ERP Costs: 3 Signs Companies Are Wasting Less Money

ERP investments have long held a stranglehold on corporate IT investments. The Great Recession, however, has pushed boards and budgeting committees to examine IT spending like never before. Not surprisingly, ERP’s juicy slice of the corporate spending pie has come under closer scrutiny.

Now, Panorama Consulting Group’s 2010 ERP Report, when compared to its 2008 data set, provides some evidence that companies have seen the errors of their ways in managing ERP systems and have taken small, but important corrective actions for the future. (Panorama’s data comes from survey respondents at 1,600 organizations that implemented ERP during the past four years.)

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To wit these three reference points:

1. Total Cost of Ownership

Data Point: In examining TCO of enterprise software solutions, the average investment costs $6.2 million compared with $8.5 million in the 2008 study. Normalized to account for different company sizes, the average initial implementation costs are 6.9 percent of annual revenue, notes the report, compared with 9.0 percent in 2008.

Panorama Comment: “This decrease of over 20 percent can be attributed to efforts to limit IT budgets and reduce implementation scopes in response to weak economic conditions. The tradeoff to these reduced implementation costs is that companies are less satisfied with their ERP investments than in years past.” 2. Implementation Times

Data Point: Organizations’ ERP implementation lasted an average of 18.4 months, down slightly from 19.8 months in the 2008 study.

Panorama Comment: “These decreasing implementation timelines can be partially attributed to a weak economy which has forced companies to more tightly manage implementations. Further, a number of companies decreased the scope of their enterprise software initiatives.” 3. Implementation Costs

Data Point: 54 percent of ERP implementations go over budget, a slight decrease from the 2008 data when 59 percent of implementations cost more than planned.

Panorama Comment: “The finding is attributed to the fact that many organizations in our study failed to identify and budget implementation costs not attributable to software vendors, such as project management, organizational change management, hardware upgrades and the like.”

The three findings shouldn’t be cause for mass celebration. On the contrary, Panorama’s 2010 survey revealed many trouble spots.

To cite but a few, from the survey report: ERP implementations take longer and cost more than expected, most ERP implementations under-deliver business value, and companies do not effectively manage the organizational changes of ERP.

And one final point of interest from the survey, for those currently in the trenches of the “SaaS vs. On-Premise” battle: On average, SaaS and hosted solutions are implemented in less time (11.6 months for SaaS vs. 18.4 months for on-premise), at a lower cost (6.2% vs. 6.9% of annual revenue) and at a slightly higher level of executive satisfaction (52.6% vs. 50.0%) than traditional on-premise solutions.

But SaaS ERP isn’t without its failings. According to the Panorama report: “SaaS implementations are significantly less likely to deliver the expected business benefits (23.5% vs. 42.9%) than on-premise solutions, and SaaS implementations are significantly more likely to exceed budget than on-premise initiatives (70.6% vs. 59% for other delivery options).”

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