Enterprise Systems (ITC-321)

Lecture 04
Ms. Sarah Farrukh
Business Case and ROI Analysis for
ERP
 COST OF ERP IMPLEMENTATION: ERP implementation
involves different direct and indirect costs
 Direct Costs
 Hardware (Server, PCs, LAN, etc.) cost: Based on the number of
ERP users and number of transactions, ERP vendors recommend
hardware size needed to run the application. It may include new user
PCs, new LAN connections, OS (Operating System) cost and DB
(Database) licensing cost.
 ERP Application license fee: Different licenses types available
depending on the user types. For example, SAP has three types of
licenses to offer: Developer license (People who will do development in
the application), Professional licenses (People who will do configuration
in the software) and User license (People who will use the application
as end user). Cost varies depending on the license type.
 ERP application maintenance costs: There is a yearly maintenance
charge. This varies between 18-22% of license fee. Though this is not
exactly part of the implementation cost, yet this need to be considered.
Business Case and ROI Analysis for
ERP
 Direct Costs
 Complimentary software license fee: ERP implementation may call
for buying licenses of other software that may be needed for running
the project. These can be software for project management (like MS
project), business modelling software (like Visio or Aris), separate
software for managing project documents, etc.
 Consulting service cost: One of the large portions of the total cost is
the cost for consulting services. There can be multiple consulting
organizations involved in the project: One for defining the company’s
 Post-implementation support: Companies may outsource the
postimplementation support. Cost for maintaining the application by
third party vendors need to be considered.
 Training: It involves costs like travel of trainers and trainees, hotel
expenses, renting out training rooms and PCs for training duration, etc.
For a company having multiple locations, this cost can be high.
Ongoing budget is required for training as new employees keep on
joining/new modules get rolled out, etc.
Business Case and ROI Analysis for
ERP
 Direct Costs
 Project management office cost (PMO cost): This include regular
costs of running the project, i.e. the rent of project office, office
equipment, vehicles etc.
 Other costs: This includes cost of temporary people engaged during
data migration, cost of third party audits after blueprint completion and
before going live, etc.
 Indirect Costs
 Cost of employees involved in the project and their
replacement cost: The best functional guys are given to the
implementation team, there will be a cost of finding replacements,
getting them trained.
 Operation disruption: There will some unavoidable operation
disruption for the business during ERP going live in terms of loss of
productivity for employees for shorter duration as they are exposed to
a new system. There can be also operation disruptions during
implementation as large number of employees are called for training
Business Case and ROI Analysis for
ERP
Cost Investments for ERP
Business Case and ROI Analysis for
ERP
 BENEFITS OF ERP IMPLEMENTATION: This is difficult
estimation as benefit realization of ERP implementation starts
when implementation ends and this benefit accrual happens
for several years.
 Direct/Tangible Benefit Areas
 Inventory Reduction: After the ERP implementation stock
location, excess stock, stock transfers, safety stock limits can be
traced. Nearing expiry stock can also be traced for consumption.
Inventory planning becomes better with minimum safety stock
requirement.
 Better Customer Service & Reduced Lost Sales: Real time
data enables the capability of making an availability check
before committing customers. There are reduced cases of
stockouts. It can be ordered before reaching to safety stock limit.
Reduced lead time for shipment and online tracking features.
Configurations features make it quick and easy to add new
Business Case and ROI Analysis for
ERP
 Material & Labor Cost Reduction: Purchase requirements
from all the departments are consolidated which helps in
reduction of procurement cost. Last-minute escalation and
follow-up are managed via better vendor schedule. No excess
inventory is stocked; Orders placed as per requirement. Less
overtime is achieved through better production planning. Better
visibility of required work help supervisors to adjust schedules.
Corrective actions, such as notifying customers of changes in
delivery dates, or altering production schedules to satisfy
demand can be taken early
 Non-tangible Benefit Areas
 Easy data entry
 Availability of information at the click of the mouse
 Implementation of best practice processes followed by leading
companies in the world that come as a part of ERP package
 Faster operation – quick goods receipt, purchase order, sales
Business Case and ROI Analysis for
ERP
Expected Benefits from ERP
Selecting Consulting Partner
 Consulting partners can be selected for different phases like
 Preparing RFP
 Blueprinting and system configuration
 Developments and reports creation
 Technical maintenance of the system
 Preparation of training materials for end users
 Post-Implementation Support
 Project can be given to single consulting company or multiple
consulting companies to bring down the cost.
Selecting Consulting Partner
 Factors for selecting consulting partner
 Vendor Industry Experience: Helps to know industry issues and
processes. Large ERP consulting companies like IBM have industry
template for industry-specific processes and related system
configurations which facilitates quick implementation.
 Process Consulting Experience: Vendor should have experience
specifically in areas where organization is looking for business benefits.
Vendor should be able to suggest some best practices, i.e. how leading
companies of the world manage this process, what metrics they follow,
and what areas needs improvement or process change is required.
Automation of existing practices will merely lead to business benefits are
remote.
Old Process + New Technology = Costly Old Process
 Client Reference & Client Satisfaction Level: Consulting company
should provide client references preferably for same industry and same
country. This helps to work on industry-specific business process
knowledge and country-specific regulatory requirements like excise, tax,
etc. Clients satisfaction level for ERP implementation and consultants
should also be considered.
Selecting Consulting Partner
 Ability to provide end to end service: This is important for
the organizations who opts for single consulting company for
whole ERP life cycle.
 Quality of Project Management: Strong project management
skill is one of the key requirements for the consulting company to
drive the project, reaching milestones on time and keep the cost
under control.
 Quality of Tools & Methodologies: Consulting companies
have their methodologies (to guide step by step process) and
tools to speed up implementation and these can be things like
data migration tool, auto testing tool, etc. Strength of
methodology and tools can be a deciding factor for which
consultant to choose.
 Presence in multiple geographies: For multi-country rollouts,
it is important that the consulting company has office and
preferably people who can speak local language at different
locations in different countries.
Selecting Consulting Partner
 Global Delivery Capability: Having presence in low-cost
countries with more number of consultants to bring down the
total delivery cost is presently used by several global ERP
players.
 Reputation & Branding: Plays an important factors of partner
selection. The consulting company’s financial position, ERP
service revenue, alliance status with ERP vendors, vision, etc. all
play a role
 Price and value for Money: Innovative pricing models,
transparency in pricing, milestone based pricing, activity-based
pricing, etc. can be deciding factor in the selection process.
Selecting Consulting Partner
ERP Consulting Company Selection Matrix
Request For Proposal (RFP) for selecting ERP Consulting Partner
RFP can have different sections like
 How and when project bid needs to be submitted? Bid security amount, bid
validity period, bidding company operations, locations and business areas.
 Current IT systems (Legacy systems) the company is using; interfacing needs
with ERP systems
 High level scope of the project
 Benefits the company is expecting from the implementation
 Detailed scope of work: company's expectation from consulting service
provider.
 For a full-scale implementation, the company will look for things like: Project
management and planning, development of business blueprint, showing
conference room pilot, system architecture design and implementation,
configuring ERP solution, data conversion and migration, conducting change
management workshops, preparation of training material and conducting
training, documentation, final preparation and go live, providing go live and
support, etc. High level project duration that the company is looking for the
implementation
 The details of payment schedule and bonus / penalty related to that
 Non-disclosure agreement for confidential information sharing especially for
Selecting Consulting Partner
Payment Schedule for consulting partner
In-house Implementation team v/s External
Consultants
The questions having external consultants are usually discussed at
company board meetings when the company first think about
implementing an ERP. Concerns are
 High cost of ERP consultants.
 Knowledge about company’s business; Company’s own people have
much better knowledge than external consultants.
 In House Implementation—Advantages
 Need not pay external consultants
 Team may have better process knowledge
 In House Implementation—Disadvantages
 External consulting team will have better package knowledge
 In
house team do not have access to methods and tools which a
consulting company brings as a part of their implementation methodology
 Implementation is not their core competency
 May lack on ERP project management skill
 Overall may not work out to be cost effective if all internal costs are
In-house Implementation team v/s External
Consultants
In-house Implementation strategy works well for roll out projects.
During the first implementation company built a core team, who
worked with the consulting company for 12-18 months, learnt the
package very well, had got a full life cycle implementation
experience, built a global template and now trying to roll out the
same template in different countries with little bit country-specific
changes.
ERP Package Selection
 Selecting the right ERP package can be a make or break for
success of ERP project.
 No package will meet a particular company’s 100% need as
these are not created particularly for them.
 Purpose is to select a package which is “good fit” i.e. meets
75-80% meet with company’s business requirements and can
support the company’s long-term goals.
 Selection committee comprises of different department heads
along with top management (CIO or CFO) and few consultants
of leading packages.
 Role of selection committee is to define the selection process
and criteria; attends all presentations by the vendor; prepares
comparative analysis vendors and finally selects the ERP
package
ERP Package Selection Process
 Having ERP Selection team in place
 Deciding selection criteria and weightages for each criteria
 Screening initial list of vendors and shortlisting a few
 Making a detailed and final evaluation of selected vendors
 Finalizing ERP vendor and enter into the contract with vendor.
ERP Package Selection Criteria
 Product Strategy, Vision and Investment in Innovation:
Includes product’s long-term strategy and roadmap, plan for
next few releases, new innovations and emerging trend. It
also includes strategy for different geographies (for country
regulations and for import-export rules, etc.) and for different
industries.
 Financial Viability: is a major area of concern as many
application vendors had either gone bankrupt or changed
hands several times like JD Edwards, was first taken up by
Peoplesoft and then by Oracle which impacts strategy and
overall management operations.
 Installed Base & Local Presence: It is recommended to
look for installed base in the same industry and same
geography.
ERP Package Selection Criteria
 Partnerships: It is important to consider the number of consulting
partners who can implement the vendor’s application package in
similar industry and similar geographical locations. Application
partnerships options are also considered for any gaps present in
ERP package. For example, ERP provider tie up with a nitch vendor
in to meet U.K. payroll and customs requirements
 Technology Maturity: includes supported platforms (Oracle, SQL,
Sybase), operating systems (Unix, Windows), server platforms (IBM,
HP), middleware platforms, application hosting, scalability,
flexibility and integration options available.
 Vendor’s Customer Service: Support provided for bug fixing,
future releases, and software upgrades should be considered while
selecting the package.
 Cost of Software: Total Cost of ownership (TCO) should be
considered while selecting ERP Package. For Example, if vendor’s
license cost is high but accelerators for reducing time and cost are
there can improve TOC of the package
Initial Package Shortlisting
 First the criteria’s and their weightages are finalized for
shortlisting.
 Scoring is done for every criteria and shortlisting is done on
the basis of weighted scores.
Final Package Selection
 For all shortlisted packages, functionality is evaluated for each
of the business requirement. Every application vendor has to
indicate that requirement is a fit or gap or can be achieved
through a workaround.
Contract Finalization with ERP vendors
 Contract is a legal binding for both the parties. Following
factors should be considered
 Payment Terms: milestones at which payments installments are
scheduled.
 Copyright clauses: source code ownership, customization rights
ownership.
 List of all deliverables.
 Software training.
 Software Maintenance and future upgrades.
 Software Installation pre-requisites and support for installation.
 Audit Review of implementation (optional).
 License cancellation cost.
Thank You