IT trustworthiness dependence for sustaining business growth
May 15 2008
ERP COST OF OWNERSHIP
A report covering the less defined cost element with the
highest impact on costs over an ERP systems life
ERP Cost of Ownership 2008 | Radar Group International
Western Europe (WE) is a high cost region with modest economical growth. The
IT maturity is high and ERP investments are increasingly becoming more
strategic as tools to:
– Drive process and production efficiency
– Drive transformation of business to suite a market and a constantly
changing business landscape
– Gain agility in operations to quickly adapt to changing market demands
The productivity in the economy has increased with an average of over 2 percent
every year since 2001. That implies that an organization that does not improve
efficiency with over 4 percent in the region is losing productivity and
competitiveness thus underlining the importance of an ERP system that supports
efficiency, flexibility and gains in business logic.
The Line of Business directs changes in strategy, tactics and business processes to
meet new challenges such as new ways of doing business, changes to gain
competitive advantage or governments setting new regulations. No business stays
the same and the pace of transformation is rapidly increasing. The ERP system
might start to become an obstacle to necessary change if the life time cost is too
Cost of Ownership (CO), defined as the operational costs and the upgrade costs
over the life of a system are the less scrutinized costs in ERP procurements in the
region. Without proper evaluation of the CO in any ERP investment it will be
exposed to risk. Any uncontrolled cost will jeopardize not only the economy in
the investment but the organizations ability to be agile and competitive. Therefore
it is of outmost importance that the CO is taken into strategic consideration
during evaluation and selection in order to proof any ERP system for the future.
Cost of Ownership (CO), the combined costs of operational and upgrade costs, is
somewhat a measure of complexity in operations. For ERP software, complexity
will mean both higher costs and less ability to keep the ERP system up to meet
ever-changing needs of the business. The result of this study shows that the CO is
the single largest cost item over the life time of an ERP system in this region. The
average CO proved to be on an average 6 times the original ERP investment
including adaptation cost.
This finding will have a major impact on how companies are buying ERP and on
decisions that companies need to take regarding their existing solutions.
Very little effort and time is spend, in an already extended procurement
processes, on the major cost elements of an ERP systems. The study found that the
CO was the less known and defined and further that the upgrade cost as the
largest cost element have the potential of adding more than 3.3 times the original
ERP investment cost to an organization.
The CO can be an obstacle or an advantage to drive the necessary change to an
ERP system in order to stay agile over the system’s life time. The study shows that
the CO of an ERP system can differ with more than double the yearly cost
between different suppliers with similar usage.
The report has found that the CO is the least defined part of the cost structure in
an ERP investment. During the life time of the system an organization will need
to pay over 6 times the original ERP investment amount for the operational costs
and the upgrade costs on a mean level. The upgrade cost has the potential of
becoming the largest cost contributor with 3.39 times the original ERP investment
cost over the life system. If the cost of upgrades is high companies might not be
able to do the necessary changes and that will have a major impact on the
CO evaluation will need to be performed as a strategic part of all ERP system
evaluation processes as the CO will have increased strategic importance for Line
of Business potential in this region to achieve targets and goals.
2. ERP investments
The ERP drivers
The procurement roadmap
3. Radar Group Cost of Ownership model
The ERP CO model
ERP CO comparisons
4. Radar Group Cost of Ownership findings
5. The importance of CO in evaluations
6. About Radar Group International AB
The objective for this report is to help customers get a better understanding of
how the Cost of Ownership (CO) affects the life time cost of an ERP system.
CO is defined in the chapter Radar Group Cost of Ownership model. CO is a
major contributor to the success or failure of an ERP investment and needs to
be investigated based on the regional differences in more detail.
This report has been completed by performing benchmark studies of over 250
enterprises and in-depth interviews with 200 CIO´s and CFO´s. Also by using
market data collected by Radar Group regularly and from Radar Group on-
line real-time benchmark tool www.it-position.com.
The cost experiences on existing implemented systems have been collected by
Datadia on our behalf. All insight and analysis has been performed by Radar
2. ERP investments
Western Europe (WE) represents a region of modest economic growth and
shows all the signs of a mature IT market. IT investments through the
dedicated IT budget encompass an average of 4 percent of the total turnover in
the organizations in the region. IT growth is on a strong level, twice that of the
average economical growth in the region. This is indicating the importance of
IT in the investment portfolios of the organizations.
In WE the strategic drivers for investments are to achieve lower costs and
increased efficiency. In a high cost region it is crucial to manage IT
investments correct in order to gain productivity. Line of Business,
management and owners has become increasingly involved in IT investments
as the IT investments are the key to success. Efficiency requirements will force
costs down and favor IT solutions that will add productivity to the
organization. Flexibility requirements will drive solutions for IT productivity
based on new demand structures and new business models.
IT resources utilization
Run IT environment
Optimize IT environment
Source: Radar IT efficiency report
Close to 25 percent of the combined IT resources in a WE organization is used
to transform the operations today whilst the remaining 75 percent are spent on
operations of the present IT production environment. The most effective and
agile organizations will be those that can redistribute as much as possible from
operations over to transformation. The ERP system is a major influence on cost
as the single largest cost item in the IT production of an organization standing
for approximately 9 percent of the total IT spend.
The total value of ERP solutions in WE amounts to 8.2 billion € and represents
the largest market segment. License sales amount to 2 billion € and service
sales 6.2 billion €. The annual compound growth will be 6 percent in 2008.
The ERP drivers
The region is an established ERP market. Strong economical growth and an
increasingly more rapid change process to stay agile are major contributors to
the demand for increased ERP functionality.
The need for efficiency improvements, flexibility and need for quicker changes
and adaptation for new business logic are the prime drivers for ERP market
growth in WE.
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: OECD (GDP per hour worked)
The productivity in the WE economy has increased with an average of over 2
percent every year since 2001. That implies that an organization that does not
improve efficiency with over 2 percent in the region is losing productivity and
competitiveness thus underlining the importance of an ERP system that
supports efficiency, flexibility and business logic gains.
The change processes in the market is becoming even more rapid and the
possibility of upgrading the system will become increasingly more important.
The users of ERP systems have experienced a very high life time cost for
implemented systems at the same time as many suppliers have high margins
on the after sales business. This has also forced many customers into having
no possibility to upgrade their existing systems. When comparing the number
of upgrades in the installed ERP base, as many as over 42 percent of the users
of a specific system with the lowest upgrade number had not performed any
upgrades at all over the life time (12 years) of the system. The spread was large
between different systems and in best case 94 percent had performed
upgrades and in worst case only 58 percent had performed upgrades. Cost
was given as the prime reason for not being able to upgrade.
The procurement roadmap
An investment in an ERP system is a change process that will effect more or
less the whole comapany. Organizations, management, external resources and
even owners are spending a lot of time and resources.
Many customers has bought ERP systems at least 1 – 2 times before. Despite
WE being a mature ERP market much effort in is spent on functionality and
implementation and little on the life time cost.
The decision process is under the influence of management and owners and a
tentative ERP investments needs to be prepared well for the management
decision. Two strategic dimensions drives the customer perception of Return
- Cost reduction - “more for less”
- Gains in efficiency - “competitiveness”
A general roadmap for an ERP investment can be described as below:
As the roadmap outlines a lot of effort will need to be put in to an ERP
Lessons learnt from project that have failed to provide value in the region are
- Driving change
- Being able to measure costs and value over time
Lessons learnt from projects that have provided value in the region are:
- Focus not only on investment costs but on life time cost in the project
- Sponsored as a strategic project by the management
A sourcing processes needs not only to have focus on system capabilities and
supplier competence but also on the strategic cost aspects over the system life.
3. Radar Group Cost of Ownership model
Radar Group’s Cost of Ownership model is based on the Total Cost of
Ownership model, but focus on the costs after the initial implementation
project. The following cost elements are usually considered in a Total Cost of
Ownership (TCO) model:
External costs Internal costs
ERP hardware purchases incl. maintenance, Infrastructure and network expansion
upgrades and disaster recovery
ERP software purchases incl. licenses, Other software such as databases, middleware, security
customization, upgrades and maintenance and operating systems
Data migration Data migration
Support & Help desk S upport & Help desk
ERP system management ERP system management
Indirect costs incl. costs for asking colleagues, system
downtime, user unique development costs etc
In order to complete a TCO analysis the benefits and the Value of Ownership
of an ERP investment needs to be taken into consideration. Benefits such as
increased accuracy in inventory, increased manufacturing on schedule,
increased compliance on-time and on-quality, reduction in costs, increased
efficiency and increased flexibility needs to be calculated and put to value.
Benefits and values are difficult to measure and to calculate in a TCO analysis.
Based on our experience the value differs between different solutions that all
meet customer requirements are relatively small. The main project investment
is in an ERP project well defined, consequently the initial cost is well known
and the value is difficult to calculate. Therefore we have chosen to focus on the
cost of the ERP system after it has been implemented as it is less known and it
will have the major impact on the strategic and operational value of the ERP
For the breakdown of the general cost elements of an ERP system in the
region, we have used the most spread and common model (the Gartner TCO
model) which encompasses the elements defined below:
Pre Project Rollout Operational Upgrade
Software costs Maintenance
Pre studies Training
costs Rollout costs
The five different cost elements in the model are all defined and should be
known to a buyer of a system. The main project cost as well as the pre project
and roll out costs are all part of the procurement process and as such
scrutinized in depth in most of the investments performed. The operational
cost and upgrade cost are the two parts that contributes to the Cost of
Ownership (CO) of the life of a system. The operational cost is mostly man
hour costs whilst the upgrade cost is a more complex cost structure around
software, hardware and reoccurring costs for adaptation and rollout.
Both elements of the CO represent less known costs and in our experience less
scrutinized cost items in an ERP investment project. As the Line of Business
expects an organization to be agile and highly productive, CO is a
measurement that we will put focus on in this report.
The ERP Cost of Ownership method
The ERP Cost of Ownership method takes into consideration that the change
process in a maturing ERP market is becoming increasingly more rapid and
efficiency and flexibility requirements are of a high importance. Close to 25
percent of the combined IT resources in organization in the region are used to
transform the operation today. The ROI for ERP investments have focus on
driving costs down and efficiency up in an environment where results are
hard to measure and hard to follow up. CO is actually a measure of
complexity in operations. For ERP software, complexity will mean both higher
costs and less ability to keep the ERP system up to meet ever-changing needs
of the business.
The Line of Business directs changes in strategy, tactics and business processes
to meet new challenges such as new ways of doing business, changes to gain
competitive advantage or governments setting new regulations. No business
stays the same and the pace of transformation is rapidly increasing. For ERP
systems to be able to stay up with constant evolving business need to meet the
long term requirements for efficiency, flexibility and changing business logics
but also offer simplicity in operations and upgrade or the CO will increase
CO is important to evaluate and measure to make sure that the ERP system
does not start to become an obstacle to necessary change in the organization.
In order to complete a TCO analysis all cost aspects as well as the benefits of
an ERP investment need to be taken into consideration. Benefits are hard to
calculate and can be assumed to have a close to equal contribution from any
operational ERP systems as the selected system in each case will have had a
good fit against the customer initial requirements. We will instead take a
stance from the requirements driving the performance needed of a future
proof ERP system and look at the cost elements with the largest cost
uncertainty. They are the CO elements operational cost and upgrade cost.
Our research has found the present mean level of number of upgrades
performed to be 1.8 upgrades over the life time of the system in WE.
Our earlier research has showed a correlation between customer satisfaction
and upgrades to the ERP system. Independent of what system you had in use,
those that had done no upgrades showed a lower general satisfaction
compared to those that had performed upgrades during the operational phase
of the system.
The assumptions that will be used for the CO comparison are based on the
trends that are driving the ERP requirements in a maturing WE market as well
as consideration of present level of upgrades in the installed base of ERP
systems in use in the region.
We have concluded that the will use the assumptions of a need for a version
upgrade of an ERP system every four years and a total life time of 12 years for
the purpose of establishing a common model based on requirements for
As the operational cost is mostly internal or external man hours in defined
processes we will put the focus our continued focus on the largest of the less
defined cost element – the upgrade cost.
As a general facilitated CO formula for simple benchmark calculation the cost
distribution on the mature WE ERP market can be summarized as:
ERP project investment Direct costs for software, hardware and
(ERPPI) adaptation of solution against
Pre Project 0.03 * ERPPI
Rollout 0.26 * ERPPI
Operations (12 years) 2.70 * ERPPI
Upgrade (3 upgrades) 3.39 * ERPPI
The upgrade cost is complex as it has different cost elements such as time,
software, hardware and reoccurring costs of other cost elements. Our finding
based on user experiences was that the largest cost drivers within the upgrade
cost are man hours and software costs. The upgrade cost breakdown in the
region was found to be:
CO cost breakdown
Man hours, both external and internal resources, was found to be the largest
cost contributor with an average contribution of 48 percent of the upgrade
cost. Software was the second largest with an average contribution of 36
percent of the incurred costs.
The report has found that the CO is the least defined part of the cost structure
in an ERP investment. During the life time of the system an organization will
need to pay over 6 times the original ERP investment amount for the
operational costs and the upgrade costs on a mean level. The upgrade cost has
the potential of becoming the largest cost contributor with 3.39 times the
original ERP investment cost over the system life.
CO is the less scrutinized cost in ERP procurements in the region. Without
proper evaluation of the CO in any ERP investment it will be exposed to risk
and uncontrolled high cost will jeopardize not only the economy in the
investment but the organizations ability to be agile and competitive.
The main conclusions of the CO report can be summarized as:
- The CO elements is on an average over 6 times the cost of the initial
investment including adaptation
- Upgrade cost amounts to 339 percent of the initial investment
including adaptation over the life time of the system
- Software cost is 36 percent of the total upgrade cost among those who
have performed upgrades
- The CO differs largely between different suppliers. The diffence can be
as much as double the CO per year for similar cases.
- The largest cost over an ERP system life time is the least defined, the
upgrade cost although organisations in the region makes 1.8 upgrades
over the life of an ERP system today. Cost for performing upgrade is
the prime reason for not have performed any upgrade among those
who state they have not.
- CO evaluation will need to become the most important part of a well
performed ERP evaluation process in the future
5. The importance of evaluate Cost of Ownership in a procurement
The largest contributing cost element of an ERP systems total cost over its life
time cannot be neglected in procurement. A potential cost of more than 6
times the initial total ERP investment over a twelve year period represents a
very high cost to all organizations. CO must therefore be addressed as a part
of detailed evaluation of an ERP system.
Radar Group has developed a more detailed ERP CO model that can be used
in order to evaluate different systems CO based on the unique prerequisites of
any individual procurement. The CO evaluation takes only one day to
perform and will be important to perform during the preparation or selection
Suppliers CO evaluation
•Industry & size •The model
•Project specific •Benchmark •Adjusted •ERP systems CO
•Suppliers assumptions rating
• Requirements to
Requirements CO calculation
Contact Radar Group for further details and cost for this one day packaging:
6. About Radar Group International AB
Radar Group covers the whole ICT ecosystem with focus on the Nordic
region. We research and analyze the technology enablers, the value adding
partner and distribution channel and the end customers. We work with
detailed business planning forecasts for all hardware, software and service
categories in the ICT market as well as with the development of all cost
elements and indicators in the ICT management role of the ICT department.
This is done by research every 6 months of all enterprises in the Nordic region
with more than 200 employees, through our unique on-line models for IT
benchmarks and value measurements and through several hundred in depth
interviews with ICT decision makers every 6 months. Using these facts from
all sides of the ecosystem we build the insight that we use in our strategic
work towards our customers.
Radar Group has offices in Stockholm, Oslo, Copenhagen, Helsinki, London