In today's economic environment of constrained and highly scrutinized IT budgets, manufacturing companies are looking...
for ways to reduce their long-term total cost of ownership for enterprise applications such as ERP.
Two of the most common targets for ERP software cost reductions are up-front software license costs and hourly rates of third-party consultants. However, ERP software maintenance and systems support constitutes a significant portion of a manufacturer's total ERP cost of ownership. If properly addressed, maintenance and support can also be an area for realizing long-term cost savings.
Here are five ways to minimize your longer term ERP software support and maintenance costs:
- Negotiate lower software license fees. The first step to minimize maintenance and support costs should occur before a final ERP software decision is made. Ongoing maintenance fees are commonly tied to net license costs, so negotiating less costly ERP licenses can reduce your ongoing maintenance and support. Not only can this tactic help reduce ongoing maintenance costs, but it will also help reduce your initial ERP investment.
- Limit software customization during ERP system implementation. It's usually easier said than done, but a key to containing ongoing maintenance costs is to limit customization to source code of the ERP software. Although it may be tempting to customize the software to create an exact fit with business processes, manufacturers should understand that software customization will cause long-term maintenance costs to escalate. Software upgrades and internal maintenance of the software all become much more complex and costly when you have customizations to deal with along the way.
- Explore third-party support and maintenance options. One of the dirty little secrets of the ERP software industry is that software vendors make a good deal of profit on annual maintenance fees. A related secret is that third-party providers may provide lower-cost support options. Manufacturers considering Tier I ERP solutions such as SAP or Oracle have multiple third-party support options to choose from, and even customers of some Tier II solutions are beginning to see similar options. If anything, these alternative support options provide an alternate price point to consider during negotiations with your chosen software vendor.
- Negotiate lower ongoing professional service rates. One of the hidden or indirect costs of ongoing maintenance and support is the hourly fees paid to your ERP software provider for professional services. Upgrades and other changes to your software over time will typically require additional vendor services, so it is useful to negotiate these rates, which are a source of high margins for most vendors. Even if have already selected an ERP solution and/or agreed to terms with your ERP vendor, it is often possible to negotiate lower rates and/or consider third-party options.
- Quantify your total direct and indirect maintenance and support costs. Companies often lose sight of their ongoing ERP maintenance and support costs after the initial deal has been negotiated and the system is live. However, over time these costs can escalate and consume a significant portion of a manufacturer's IT budget.
It is important to paint a clear picture of not only how much is being paid for support direct from the software vendor, but also how much is being consumed from indirect vendor support costs, such as third-party consultants and internal resources required to support the ERP system. Once you have a handle on your total annual maintenance costs, you can take steps to renegotiate those recurring fees.
In addition to the above steps, there are three other things to keep in mind when trying to contain long-term support and maintenance costs:
- Most vendors charge 15% to 20% of license costs for annual maintenance. This annual fee is negotiable.
- Be sure to negotiate maximum increases on maintenance and support in the future.
- During implementation, focus on transferring knowledge from the consultants providing software maintenance to less expensive internal resources.
These points represent just a few of the steps that manufacturers can take to get on the path toward manageable ERP software maintenance and license and support costs.
About the author: Eric Kimberling has over 15 years of international ERP business experience. He is the president and founder of Panorama Consulting Group, a Denver, Colo. consulting firm that provides ERP consulting to international companies. Panorama helps clients with ERP software selection, ERP implementation, organizational change management and benefits realization.