ERP Software Total Cost of Ownership (TCO) - By: Ryan Mutt

Total cost of ownership begins with calculation of all direct and indirect costs involved in all the processes of ERP software's life cycle starting from implementation to replacement. Most of the time when it comes to ERP, total cost of ownership is calculated as per cost of buying, implementation and IT infrastructure required for running the software. This can be seriously misleading as TCO of ERP software has many silent expenses which are evident after the implementation process.

The best way to control total cost of ownership of ERP software is to take wise steps right in the beginning, asses the cost those can be incurred in the start as well as during its life cycle and keep those costs under control. For TCO analysis there are five aspects of ERP life cycle which play a major role, these are acquisition, implementation, operations, maintenance and replacement.

Before implementation selection of proper ERP which suits to the need, size and working style of the organization can keep TCO under control to a large extent. Functional analysis of the company which can clearly and in detail depict the present working, identify problem areas, chalk out the flaws in the functionality and identify areas which can be corrected or improved with the use of IT, helps immensely in proper ERP selection. The “as is” document of the organization helps in matching the most suitable ERP, applying TCO with this, it brings down the cost which is incurred by customization, purchasing of add on tools, training, hiring IT manpower to install and make the software run without problems.

Identifying cost involved in implementation process for calculating total cost of ownership of ERP software is comparatively easy as this process involves mostly direct costs. The cost of purchasing the software itself, servers, clients, peripherals, networking infrastructure, software for support and maintenance are some of the costs which can be calculated. If functional and technical analysis has been done by hiring an external consultant then this cost is also added up in TCO analysis.

Operations and maintenance are the two processes for which assessment of costs is important as these phases of ERP software life cycle incur heavy costs on total cost of ownership. Both of these phases of ERP life cycle are process and people oriented hence it is difficult to assess hidden costs yet in these phases most of the indirect costs reside and direct costs are shifted away. Staff training, inclusion of skilled and trained IT team for internal support, use of most suitable implementation strategy, change management, availability and cost of new upgrades and benchmarking of current operations are few centers which shall be studied well to identify hidden costs in operations and maintenance phases.

Cost of replacement for total cost of ownership calculation of ERP software is completely based on assumptions but can be done on hard facts by analyzing present scenario. Some factors which may allow determination of approximate cost of replacement or avoiding replacement are stability of the ERP vendor, technology of the software, dependency on the vendor for future support and smooth functioning of the ERP software, disaster management, recovery management and identification of most suitable substitute of the ERP software can help in calculating much realistic cost of replacement in total cost of ownership analysis.

About the Author

Read information about ERP Vendor Selection. Also know the ERP Software Features. Read Microsoft Dynamics AX Review.

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