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Total Cost of ERP Ownership - Understanding the Total Cost

Many organizations commit a serious mistake underestimating the hidden costs. Hidden costs often contribute 20%-25% of the total cost of ERP ownership.

Total Cost of Ownership (TCO) implies to an estimation of financial expenses of a business organization that includes direct investment costs and hidden costs of a system. Total Cost of ERP Ownership encompasses the cost of procuring hardware and software, implementation, data migration, in-house training, support system and other hidden costs. Many business organizations commit a serious mistake underestimating the hidden costs. Hidden costs often contribute 20% of the total cost of ERP ownership.

Expenses on Software: The total ERP implementation system comprises of basic software modules where some ERP vendors provide add-on tools according to the business requirements. More the add-on applications or variations in software, more is the number of end users increasing the total cost of ERP ownership. Complex features of the software along with integration with the external business entities again raise the TCO considerably. Specially designed software for middle and big sized organizations come at fairly higher costs. Systems supporting multiple languages, currencies, location, e-business and wireless features also augment the TCO.

Expenses on Hardware: Although hardware expense of ERP is a direct cost that can be computable, it occupies a major chunk in the TCO. This includes procurement of various hardware systems, workstations, servers, integration equipments and the system software. The expenses on hardware can surpass half million dollars for a middle sized organization, though the cost depends on the ERP features provided.

Expenses on Integration and testing: This is a never ending expense and cannot be easily computable. Integration of software is carried on along with the ERP implementation followed by subsequent testing. It involves equal participation of buyers and vendors as the testing is carried on in various levels. Recurring expenses regarding testing and integration of different software modules and the functional areas raise the total cost of ERP ownership.

Training expenses: Expenses in training the in-house staff depend on the number of staff and time period. About 13-17% cost of ERP implementation is invested for training purpose. Training cost can be reduced if the organization houses pre trained staff. Moreover, all the staff cannot utilize the ERP system to the maximum due to lack of proper training. Time taken to get acquainted with the ERP system and performance pressure also raises the TCO.

Consultation expenses: Expense on consultation is one of the hidden costs of ERP implementation that can surpass any estimation. Companies buying ERP package system within $3 million often end up in spending $8-$9 million on consultation. Remote consultation is provided in few cases to reduce the expenses, but business organizations located in remote areas may require full time on-site consultants.

Expenses on data migration and data conversion: This also contributes significantly in total cost of ERP ownershipComputer Technology Articles, as both these operations must deliver error free reports. Sorting the unnecessary data and valid ones are important tasks that demand accuracy.

Article Tags: Total Cost, Hidden Costs

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