Abstract of my Ph.D. Thesis 2004: Estimating and Influencing the cost of ERP-Systems in Swiss SMB

Small and medium-sized enterprises make substantial investments in ERP-projects. Still, many do not know the costs associated with such projects and how they can influence the costs. This thesis addresses the needs of such businesses by offering a simple cost estimate together with various recommendations for influencing cost and success of ERP-projects. It is based on the analysis of about 40 project including 5 case studies.

Cost estimate

The cost drivers of ERP-systems are mainly the number of users and the complexity of the project. Many other aspects can influence the cost and might be a major issue in single projects, but they didn’t prove to be relevant in the general analysis.
Cost = a + b*Users+c*complexity+e
The formula was substantiated for small and medium-sized manufacturing companies in Switzerland using the data of 40 projects. It showed that the complexity of a project can be approximated by the team size. The accuracy of the estimates is limited by many factors which can not be accounted for in an early stage of the project. But it is similar to the accuracy of the observed budgets, which were based on much more thorough analyses.
ExpectedTotalCosts[CHF]=160’000+9’500*Users+56’000*Teamsize
ExpectedInvestmentCosts[CHF]=160’000+5’000*Users+34’000*Teamsize
Total project costs can be estimated better than investments alone, because the vendor decides according to his pricing policy to ask more up front – leading to higher investment costs – or to charge more maintenance costs later. Therefore it is strongly suggested that the maintenance costs get the necessary attention during the evaluation.
In practice many use the much simpler estimate, which depends only on the number of users. Often the complexity gets partly included by adjusting the cost per user. It showed that between Fr. 6’000 and 30’000 per user were used. The investment cost per user of the developed formula is bounded by the 95%-confidence interval between Fr. 10’000 and 15’000.
ExpectedTotalCosts[CHF]=20’000*Users
ExpectedInvestment[CHF]=12’000*Users

Recommendations for ERP-customers

ERP-customers who want to influence cost must be careful not to endanger the benefits of the system or the success of the project. Therefore factors which reduce costs and improve the success of the project have first priority when trying to reduce the cost. Avoidance of adaptations, investments in evaluation and raising the project competence as well as the capacity of the team members, are some of the important factors.
Service costs can be influenced best. They, on the other hand, depend largely on how much effort is being put into actual adaptations of standard ERP-solutions. Adaptations can be avoided by rethinking internal processes, by choosing the right ERP-System, and by refraining from implementing too many specific wishes. It can also be shown that avoiding adaptations doesn’t reduce the benefits of an ERP-project but even improves project success.
It cannot be expected of an average small or medium-sized business that its project managers or team members know who’s who in the ERP-market. Therefore it is strongly suggested that businesses invest adequately in evaluation by engaging independent consultants, to ensure that an optimal ERP-system gets chosen. A lot depends on the choice of the system, still only 26 % of the observed businesses called upon external help for their evaluations and the ones who did, spent only 1 % of the investment amount for this purpose.
Competence and capacity of the project manager and the team members have a strong impact on the success of a project. Therefore it is important that the most able staff members get released from a substantial part of their daily duties. Depending on the number of competent employees with free capacity, more tasks can be handled in-house, which further reduces external costs.

Recommendations for ERP-developers

These recommendations mainly address small, local developers which operate in the SME-market and who are often confronted with pressure from mighty international competitors such as Microsoft, SAP and other large-scale enterprises. A growth strategy is less applicable for the smaller developer since this means entering into direct competition with the big ones of the industry.
Proximity to customers is the key to success for small and local developers. Instead of imitating large competitors, strengthening the proximity to customers by focussing on a few branches of trade and regions, is the name of the game.
To be successful the developers should support the already identified recommendations for ERP-customers. A possible chance to do this is by reducing the software licences leaving hardware and service costs as the only investments. This makes the offer more attractive since it has lower risks and it makes it clearer to the customer that adaptations are the main source of higher investment costs.
Training costs represent an important part of total service cost. For this reason developers should focus on improving the ergonomics of a system rather than adding additional functionalities. Intuitive software helps users to learn faster and leads to higher motivation. More functionality on the other hand will hardly be noticed by a majority of users, because most up-to-date systems satisfy their needs with respect to functionality and therefore many of the hyped functions hardly get used.
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