by John Hoebler

The ERP upgrade conundrum: How to calculate the true cost

Jun 25, 2015
Enterprise ApplicationsERP SystemsProject Management Tools

If you use an old on-premise financial management solution, you have a difficult decision to make over the next few years: do you upgrade the application one last time and get a few more years out of it or move to a modern cloud solution? This is the first of three parts that will help you answer that question.

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If you are running an on-premise ERP system, you need to determine if you should upgrade it again or look to implement a new modern solution. In this blog series, you will find step by step guidance on how to make that decision.

In part one, we will cover how to determine the true cost of the upgrade and the cost to maintain this over five years.

How to calculate the total cost of your upgrade (upgrade TCO)

If you make the decision to upgrade, you need to calculate the total cost of that decision over a multiyear period. The cost elements you need to consider:

1. Upgrade project. These costs include consulting fees, internal IT personnel costs, new hardware and software, the opportunity cost of your finance team working on the upgrading vs. other value added activities. Don’t forget about additional consulting fees and/or internal costs for the post-upgrade stabilization period.

2. Infrastructure. These costs include implementation, support and maintenance of an entire technology “stack.”

3. Operational support. These include internal and external costs associated with the day-to-day support of your ERP application.

4. Maintenance and support. These include your maintenance and support fees from your application software vendor plus support fees for the hardware, operating systems, and databases.

5. Support project costs. Many ERP systems require you to do mini-projects throughout the year to keep your application up and running. These include projects to apply patches, fixes and implement new features and functionality. Some on-premise vendors are switching away from the traditional “release” model and putting out smaller updates that companies can selectively adopt. This is a significant change, but it still puts the burden and cost on each individual customer to evaluate, apply and implement the new feature.

6. Status quo opportunity cost. Most companies have been on their ERP system for quite some time. They have built their processes and workarounds based on the capabilities of the current system. For example, older ERP systems tend to be architected around a general ledger and sub-ledger concept. Financial results are not readily available until the end of the month in the GL because the data is in a sub-ledger. Those processes have not yet been run to transfer the data from one system to another system. In order to get financial results, companies may build temporary solutions to provide inter-month reporting, or worse, live with the result. What is the cost of these solutions? What is the cost of not having timely information? Companies should identify pain points in the current process and if the reason for the pain point is “because that is the way the system works,” then you have identified a potential status quo cost.

These are six real costs that will be incurred over a three to five year window if you make the decision to upgrade your ERP system. After documenting these costs, companies then need to evaluate the market and determine:

  1. What solutions are available today?
  2. Do they address my pain points and are they sufficient for my needs?
  3. What will it cost to implement the solution?

I will provide additional insight and guidance on how to answer these questions in part two of this blog post next week.