14/03/2011

By John Antunes, Director of SME and Channels, SAP UK

Just about every fast growing small and medium sized business assessing whether or not to roll out a new Enterprise Resource Planning (ERP) system will look to calculate their Total Cost of Ownership (TCO). One of the misconceptions in the market today is that companies wishing to calculate TCO typically perceive this to be about license costs, support, and hardware upgrades.

In reality, TCO is about a lot more than just the licence, implementation and support costs. Companies looking to calculate TCO really need to take into account much more including business performance and value derived from an ERP implementation, the impact of legacy systems and scope for change.


Value

According to a recent Gartner survey, only 37% of companies today actually track the value derived from their ERP system. This is particularly true in the SME market where IT resources are typically more stretched and thus the IT team often believe that they do not have the resources to put in place the KPIs that are required to measure the value add of the ERP system.

To assess TCO, it’s really critical that SMEs take into account the business performance that an ERP implementation is going to give them — not only in the immediate future but also much longer term. It is really no longer just about pricing. SMEs also need to think about the TCO and value in the wider context of what it means to their individual business, and this may vary widely depending on the type of business.

Gartner also suggest that other things such as the vendors’ partner community and the value they bring beyond just the core ERP implementation are equally as important when making the decision.

The starting point needs to be a clear understanding of the strategic significance of an ERP solution to the business. All too often, businesses go into the vendor selection process thinking that the ERP solution is going to be the saviour of all of their problems and miss the key fundamentals of understanding why they are looking for an ERP solution, what it is they need it to do for their business and the business value it will bring to their organisation.

But why is this important? If these reasons are not clear up front, there is a real risk that the implementation and acceptance of the new system will be slowed, thus affecting implementation processes, costs associated with this and the realisation of business benefits. So it’s really important to look at the strategic role and assess this to get a clear understanding of where the TCO is going to have an impact on the rest of the business.


Legacy Impact

Gartner also say that the decision on whether to retire or retain any legacy applications will have an impact on TCO over time. Many SMEs will have built independent pieces of functionality and bolted these on to their core system, so they need to think about whether they retain these or if they make the replacement of these a mandatory requirement. Insofar as this is concerned, the creation of a cross-functional team within the business to govern changes to the core system and assess which direction to take, and whether to retain or replace, is crucial. Gartner estimate that establishing the retain or replace criteria as early on in the ERP vendor selection process as possible could save between 3% to 5% on costs, over a three to five year period.


[u]Capacity for Future Change[/b]

The other key thing for SMEs to ensure is that they do not select a vendor that will not be able to meet the functional demands required to really add business value in the longer term. Getting three years down the line with an implementation and then suddenly realising that the ERP solution chosen lacks key functionality or is now unable to meet business demands will significantly drive up TCO. This could then leave a business in a position where it has to begin applying bespoke applications to plug the gaps, or even worse have to replace the whole system again.

The other thing to think about is how much the business may change during the systems’ lifecycle for example through an acquisition or leadership change. It is critical to determine whether the chosen vendor and partner can support fully through these changes as a failure to do so could result in a major upturn in TCO.

Furthermore, according to Gartner, the Capacity for Change within a business is another factor that often gets overlooked. The business culture, external and internal resources, the amount of training required and the ability to absorb the changes are often underestimated. Without this consideration, businesses run the risk of low adoption rates of the new ERP system internally and therefore can miss out on maximising their ERP investment.


Investing in new technology is a big step for SMEs.

However, by considering the bigger picture and taking into account additional factors such as value, impact of legacy systems, future business change and culture, smaller businesses can prepare themselves, control TCO and position their technology to be a fundamental part of future growth.