There is a lot of information on the web about what is ERP that is published by ERP consultants, ERP software publishers and partners. However, there is not very much information on how much to spend on an ERP solution. So, how much should a typical small to medium-sized business spend on a new ERP solution? Research says that an average company’s overall information technology spending is typically 3–5% of their revenue. Depending on a company's unique requirements and industry specifications this ERP investment can even get into the 17-20% range.
There is an interesting discussion string on Quora.com’s Management Accounting Comments about this topic - how much to spend on an ERP solution. One CPA that replied in the how much to spend for an ERP solution discussion that, in his experience, companies spend over 10% of revenue on a new ERP solution during an initial implementation year and they are typically are spending more than 1-2% annually on an ongoing basis for software maintenance plans.
One of our ERP consultants has a rule of thumb for how much to spend for an ERP solution for manufacturing and distribution companies. His rule of thumb is that supply chain type of companies budgets depend on their profit per dollar. If you take their gross revenue and multiply it by $0.05 (which is a typically profit per dollar) and then multiply that number by 10-15%, that will calculate a ballpark budget that this type of business should be able to spend for a new ERP solution.
What is ERP: How Much to Spend for an ERP Solution Sample Calculation:
- Gross Revenue: $10,000,000 x .05 = $500,000
- ERP Budget: $500,000 x 10% = $50,000
On Quora, many of the commenters said there is no set percentage on how much to spend for an ERP solution, because it will vary according to these factors.
- What kind of ERP software do you need? If you need a simple accounting package you’ll spend a lot less than if you need a full featured manufacturing package with shop floor data collection.
- How important is the ERP software to you (strategic investment vs. necessary evil)? If the management and owners see no strategic advantage to be gained from technology, then they’ll be willing to spend much less on a new ERP solution.
- How much will the software add to your bottom line? If the business has some real inefficiencies caused by the current technologies and they can save a lot of money by improving these processes, then they’ll be will to spend more on a new ERP solution.
If you are considering how much to spend for an ERP solution, keep in mind that the actual ERP software cost will be a minor portion of the total cost to implement and train employees on the new system. On top of software license cost there could be an investment in hardware and hosting in addition to the usual consulting, training and internal staff ramp up time. Focusing solely on software costs may prove to be limited approach in the long run. In order to make an informed purchase, be sure to look at all costs when picking a new ERP solution.
Stay tuned for the next 3 parts of our 4 part series on What is ERP to learn how to select an ERP solution, how to select an ERP partner and how to select an ERP solution and partner.
