ERP applications are finally starting to live up to the hype that was started over two decades ago. Streamlined, efficient, and interconnected business management solutions are a reality now, as so many of yesterday’s obstacles have been removed by the technology of today.
Meanwhile, however, the way customers are being charged for their ERP systems remains unchanged. The industry still relies on the same rigid pricing and licensing methods of the past. Let’s take a look at the seven components that go into this opaque and torturous calculation:
1. Users - First, on top of the initial software cost itself, nearly all ERP vendors charge a fee for each user of the system. Prices are charged against specific user names and limited (one system at a time) access or by the total number of users that can concurrently access all systems. (NOTE: many ERP systems will require individual licenses not only for each user, but also for each device used by each user. Those 10 partners you’re adding to the system may need upwards of 20 licenses.)
2. Industry - The expense of an ERP system also varies from industry to industry. A large manufacturing or distribution company might need to supplement its base accounting and financial functions with inventory management, or shipping and receiving, for instance, which a field service company would probably never need. Naturally, these additional functions add to the overall cost of the base product.
3. Integrations - It’s important that third party software products (or extensions) can be readily integrated to an ERP solution to meet additional business requirements such as credit card processing, sales tax automation, and EDI compliance - to name but a few. Other new technology capabilities may come into play as well, including natural language processing, AI and machine learning, and contextual in-application help. There’s always an expense associated to integrating these third party products, even if that’s only paying for the time of a talented developer.
4. Customizations - Most experts say fewer than 10% of ERP buyers will use their solution out-of-the-box and un-customized. Customization (not to be confused with standard package configurations) can add up though, especially if you’re in a niche industry with specialized business processes.
5. Implementation - yes, it also costs an additional amount to implement ERP software.
That price is determined by a number of factors such as:
- Complexity of the implementation
- Volume and complexity of data to be migrated over from the old system
- Number of external interfaces to support
- Volume of transactions
- Complexity of customizations
- User training on the new system
Implementation services can sometimes cost three times as much as the software itself.
6. Deployment model - Businesses implementing a new ERP software system must decide whether to deploy an on-premise or a cloud-based version. Broadly speaking, the software license is either purchased outright or paid on a monthly subscription basis. Each purchase method has its benefits and liabilities, including:
- Capital expense vs. operating expenses
- A large upfront cost vs. monthly payments on a subscription basis
- The total cost of ownership during the product’s lifetime
- IT management and maintenance
- Security and ease of access from mobile devices
- Upgrades – annual maintenance fee vs. included with subscription
7. Training - Who’s going to teach the new users how to use their new system? This too usually represents an additional expense.
Customers need ERP pricing and licensing flexibility
Complicated, isn’t it? But these pricing components are for the most part necessary. ERP systems cover the entirety of a business and there is no such thing as a universal, one-size-fits-all solution. In fact, I believe that prospective ERP customers need still more (and better) options to make a good purchase decision. Having the full range of deployment choices is important for reasons of security, intellectual property protection, compliance, cost control, and even simple convenience.
Cloud, on-premise, and hybrid solutions all have sound reasons for existing, and an ERP vendor should be able to provide whichever one makes the most sense for each customer. Similarly, the way a new system is implemented should be up to the customer. In descending order of expense, implementation can be done by the software publisher, its local channel partner, or even the customer, although ideally the labor is shared by two or all three of those entities.
Integrations and customizations will inevitably be required. An ERP platform with open APIs will make it much easier for third-party applications to “talk” to the central system as well as each other, and low-code or no-code customization capabilities can drastically reduce or even eliminate the need for developer coding skills.
Choosing the right, adaptable platform can make all the difference between an ERP system of the moment and one for the ages. Specialized industry editions can also help keep the costs of an ERP system in bounds. Field service functionality can be bundled into one version, while manufacturing functionality is included in another, with the cost savings inherent to a prebuilt solution that doesn’t need additional functions. Which brings us finally to users again.
ERP vendors that charge per user are generally doing their customers a disservice. When the price of entry to the system is expensive a company will naturally limit it to as few people as possible.
Customer choice is the key to ERP cost containment
But what if the system’s cost is based on its usage rather than users? Then more people are welcome to help get the work done as efficiently as possible.Then everyone in a company can access the most up-to-date and accurate information, empowering them to make informed decisions and removing the bottlenecks that so often occur in overloaded growth companies. It’s far more cost effective and equitable when ERP pricing reflects the volume of a company’s key transactions as they expand or shrink, rather than how many people must be added to handle the workload.
When we look at the disruptive impact of serverless computing on cloud infrastructure management, it’s clear that the evolution of cloud pricing models is elastic and consumption-based. The technology to price software this way is no longer a constraint. Yes, some organizations may opt for different models, but one thing we can be sure of: customers will want the option to consider consumption-based cloud pricing – and that will extend to how they pay for their business application suites as well.
Again, more choice results in better cost containment. Customers can start by licensing the transaction volumes they expect to use, then adjust resource levels and data storage as needed rather than being forced to adhere to “one-size-fits-all” pricing that charges for each user of the system.
Today’s ERP solutions are literally light years ahead of where they began, but there is still much work to do. The industry at large must also modernize its approach to pricing and licensing. It must offer customers more choice across the spectrum of cost components, from users to implementation and deployment and all the stages in between and afterwards. That includes specialized industry editions, low-code and no-code customizations, and free training. We’ll reach that point soon, I’m convinced, but until then Mr./Ms. Customer, please choose your next ERP provider wisely.