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Explaining the hidden costs of ERP implementations

It's easy to know what the software costs, but what about variables like customization, productivity and training? Experts reveal the pitfalls so you can avoid expensive surprises.

ERP software remains a bedrock of nearly every organization's IT stack, so it is no surprise there's strong demand to replace legacy systems with new, cloud-based versions, including SaaS ERP.

But experts said most CIOs are hit with unexpected costs as they shepherd these ERP projects from design to deployment and beyond.

The costs typically stem from underestimating the work involved or work that wasn't figured into the project price in the first place. One recent study, the "2023 ERP Report" from Panorama Consulting Group, found that 47% of organizations went over budget on their ERP implementations.

Why ERP implementations are so expensive

According to the Panorama report, the median ERP implementation cost among the 183 survey respondents was $625,000. To put that in perspective, respondents reported a median annual revenue of $1.5 billion.

The hefty cost matches the software's complexity.

ERP is one of the most complex pieces of software in the enterprise tech stack because it supports processes in nearly every part of the business. ERP platforms have components, called modules, for functions such as accounting, finance, HR, customer relations, procurement and supply chain. An ERP system typically streamlines and often automates the processes it supports.

However, bringing all these business units and their processes into one system creates a lot of work, such as connecting the ERP software to other systems and ensuring data can move seamlessly between them.

In fact, much of the expense of bringing a new ERP system online comes not from the technology's price tag, but from the work required to determine the organization's needs, map connecting systems, deal with data and train workers on new business processes.

Organizations that fail to put in adequate planning upfront are the ones most likely to encounter hidden costs and budget overruns, said Wally Merkas, senior manager in the cloud solutions and management consulting practice at professional services firm Withum.

List of 10 ERP implementation steps
Without proper planning, unforeseen expenses can lurk in every step of the ERP implementation process.

Hidden costs of ERP implementations

Despite such advice, many organizations still get hit with unexpected bills from their ERP implementations. IT leaders cited the following nine items as the most common hidden costs.

1. The final price of the software itself

One of the first surprises to hit organizations is the licensing costs. Many organizations learn as they start the implementation work that their plans weren't as accurate or as detailed as they should have been, said John Harrison, managing director at consultancy Protiviti.

"If you're not granular enough, then a certain amount won't be included in that first bid. So, as you go through your design phase, you realize you need more modules, and that can be a quick escalator on the software cost side," Harrison said.

2. The cost of a bad fit

Similarly, organizations that don't fully understand their processes can select an ERP system that does not match their needs. "A lot of people pick the wrong application," Merkas said. That might not tank the entire project, but it usually leads to unanticipated costs for the extra work needed to bring business needs and the new software into better alignment.

3. Underestimating or missing needed connections

Organizations underestimate how many systems need to connect to the new ERP platform, Merkas said. They then face new bills to pay for the labor, technology and other requirements to implement the integrations.

Harrison said he, too, has seen these costs sneak up on organizations, citing, as an example, how companies might see an increase in middleware subscription costs as a result of pumping data into their new ERP software.

4. The high cost of customization

Organizations that tweak their ERP systems to their own unique workflows also face unplanned costs, Merkas said. Modern ERP products, especially multi-tenant SaaS ERP platforms, support processes that meet industry best practices and have optimized and automated those processes to help organizations become more efficient. However, when ERP buyers don't already use or want to adopt the industry-leading processes and instead want to customize their new ERP system to work with their existing workflows, they can be shocked by the price they pay for taking that path.

5. The ongoing costs of custom code

"A lot of the delivery consulting firms will say yes to the customization requested by [organizations], and when they're saying yes to the customization, they're just going to bill the client for the code," Merkas said.

Then come the ongoing costs. The ERP buyer -- not the vendor -- owns the custom code and must do all the updating and maintenance.

"That customization will cost a lot of money in the long run," Merkas said.

6. The true price of talent

While organizations typically experience unexpected labor costs when they misstep in planning their ERP implementations, many face other surprises from miscalculating the available talent, said Sam Gupta, principal consultant at ElevatIQ, a provider of technology, management and digital transformation services.

For example, enterprise leaders often underestimate the skills required for the ERP work and overestimate the expertise of their own employees. That leaves a big shortfall in the talent needed to move the ERP project across the finish line.

Enterprise leaders also tend to overestimate the availability of their workers, expecting that they are able to work on the ERP project while still performing their regular duties. When that doesn't pan out, organizations end up paying for extra help to work directly on the implementation or backfill positions so that staff can shift from their regular jobs.

7. Dealing with data

One of the most significant hidden costs on almost all ERP implementations comes from the data work that's required, said Greg Taffet, managing partner and CIO at Taffet Associates, a strategic technology consultancy.

Organizations often don't have a good handle on their data as they head into an ERP implementation, in part because their legacy ERP software hindered data management in the first place. And, unless they were meticulous in building up their data program in advance of the implementation, they encounter surprise bills for cleaning, managing and migrating their data to the new ERP system, Taffet said.

8. Missed work and missed business opportunities

Besides the unexpected costs associated with backfilling positions as employees shift to working on the ERP implementation, organizations face other hidden talent costs. Specifically, they often find that the workers covering for the diverted staff aren't as experienced, so work takes longer to complete or may go undone, Harrison said. That, in turn, impacts productivity levels and perhaps the ability to act on business opportunities -- both opaque costs of an ERP project.

9. Resistance to change

New ERP systems aren't enhancements as much as they are transformations, and they require employees to work in new ways, especially if they were used to an old ERP system, Taffet said.

"We actually have to work on changing people's mindsets," he said.

But, too often, organizations don't anticipate how much effort such a transformation requires, so they underbudget training and underestimate the time needed for changes in the workplace.

They pay a price for miscalculating, he said. Productivity drops as workers muddle through, and training costs rise as they try to catch up with managing the change. Or employees develop workarounds and resist adopting the new processes enabled by the ERP platform, which lessens its value.

Hidden costs expected but not inevitable

Studies have shown and experts have attested to the frequency of cost overruns in ERP implementations.

But hidden costs aren't inevitable, Gupta said.

He acknowledged that the cost of some ERP implementation work is hard to pin down, such as the costs associated with readying and migrating data. And many organizations struggle to build accurate cost estimates because they don't do ERP implementations often.

Those factors can be mitigated with more comprehensive upfront planning, Gupta said.

"The only way to remove invisibility from any model is to really break down your plan," he said. "You have to break down your implementation plan to know what you're going to see, and you need detailed planning assessments at the process, data and technology levels."

Mary K. Pratt is an award-winning freelance journalist with a focus on covering enterprise IT, cybersecurity management and strategy.

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