ERP software is always going to be a big-ticket item -- but the purchase price isn't necessarily the biggest chunk of the total spend.
Support is one of the largest line items in the total cost of ownership (TCO) of an ERP system -- both the ongoing vendor maintenance fees and the costs associated with hiring the in-house personnel necessary to support the system.
"Part of choosing an ERP system is that you have to look at not just the initial investment but the ongoing costs," said Eric Kimberling, president of Panorama Consulting Group, an ERP consultancy based in Denver.
Frank Scavo, president of Computer Economics, an Irvine, Calif.-based IT research and advisory firm, divides recurring support costs for ERP into three main categories: personnel, maintenance fees and technical infrastructure costs.
"We estimate that ERP personnel costs account for 73% of recurring costs of maintaining ERP," Scavo said. "Maintenance fees are roughly 18%, while hardware and infrastructure costs are 9%."
Not all IT support staff devote their time solely to ERP, however, making personnel costs difficult to pinpoint accurately. It's not a matter of assigning a salary to the ERP budget. For example, "How much of the Help Desk costs are ERP related?" Scavo asks. "You don't get a single bill for support personnel. And IT managers rarely slice personnel costs by systems, so that's why a lot of that is hidden."
And though maintenance fees represent a smaller piece of support costs, that piece is growing.
"In terms of percentage, maintenance fees have grown from 15% to 17% of license costs 10 years ago to almost 22% to 25% now," said Ray Wang, principal analyst at Forrester Research in Cambridge, Mass. "As vendor discounting on software licenses has gotten higher, they're making it up in the maintenance side of the business."
In fact, in July SAP began moving all of its customers to one support offering, Premium Support, which costs 22% of net licensing fees. Previously, it had offered a cheaper support option -- 17% of licensing.
Support costs vary widely, Kimberling said. "It depends on a number of factors -- whether it's off the shelf versus open source, the level of customization, whether the technical architecture of the platform is proprietary. There's no one answer."
A number of cost-reduction tactics can help companies get ERP support costs under control, but there is no silver bullet. Depending on the ERP system, the following are worth consideration.
There are three types of consolidation: consolidating disparate ERP systems into one package, consolidating different versions of the same ERP package, and consolidating onto a single instance of ERP software.
"It's a viable strategy and reduces complexity," Kimberling said. "If you have one system, there's less integration, less training and you don't have separate people supporting different systems."
It also should drive up productivity amongst ERP support staff, Scavo said.
"There is a very significant economy of scale in ERP support," he said. "ERP support personnel in larger installations are significantly more productive."
Consolidation requires money, time and effort, however, and companies should be prepared to give up flexibility in certain functional areas. "Every ERP can't be everything to everybody," Kimberling pointed out.
The simpler the system, the easier it is to support.
"Keep it as vanilla as you possibly can," Scavo said. "Systems that are even moderately modified are more costly to maintain than those that stuck to the original vendor code."
In fact, the cost is even greater, since companies running highly customized software are less likely to upgrade. Kimberling said that the best way to avoid costly ERP support is to choose the right software in the first place.
"Lots of companies get into trouble with ongoing support because the software they chose is not a good fit," he said. "So they try to force-fit it through customization and third-party bolt-ons." Consider not only technical fit, but functional fit, vendor viability and costs, he suggested.
Investigate third-party support
The emerging practice of third-party ERP software support offers big cost savings. The downside for CIOs: They lose access to patches, vendor support and future upgrades, although they will still receive tax and regulatory updates from the third-party vendors. But for companies with no plans to upgrade, the savings can be worthwhile.
"Any company that isn't going to upgrade [its] ERP systems, such as those with highly modified systems, should be looking at third-party support," Scavo said. For example, the City of Flint, Mich., a longtime PeopleSoft customer, saved more than 50% on annual support fees by switching to Las Vegas-based Rimini Street for its ERP support.
The city's HR and payroll system was so customized that the IT staff faced a huge migration and testing task with each upgrade, so the loss of upgrade access was not a big factor. The payoff has been huge, according to Tom O'Brien, Flint's IT manager.
"For a city our size, support was a significant cost, especially when you add up the maintenance fees, the many hours spent incorporating modifications, and the lost time spent by our end users with the amount of testing that had to be done, especially when it came time for a software upgrade," O'Brien said. "The savings have meant a lot, and the service has helped us maintain our system to the highest standards of compliance and uptime. Plus, our IT department is more cost-effective by not having to apply unneeded bundles of bug fixes from the vendor."
Alternative ERP software options
Both Software as a Service (SaaS) and open source ERP systems can cut costs, but each comes with pros and cons. SaaS will be the lower-cost option support-wise, as the software is not hosted on-site.
"The main drawback is flexibility," Kimberling said. "Since you don't own the software, you can't upgrade and customize as you want."
Open source ERP software has a very low initial investment, but support is still complex, and skilled open source IT staff are more difficult to find.
"It's not a common skill set," Kimberling said. "You're not going to find people on the street that know how to set up the software. We've had clients talk about open source as an option, but very few will actually go forward." In the end, ERP support costs will continue to be highly individualized by company. But as price-busting support options continue to grow, CIOs should be able to make a dent in that line item.
Carol Hildebrand is a long time business and technology writer based in Wellesley, Mass.