Figuring out how much a new ERP will cost you is a tricky question. But it is key to determining whether now is the right time to replace your system. Often when looking at the cost of an ERP, many people make the mistake of just looking at the obvious costs associated with buying new software or the ROI a new system offers. However, I would like to argue this approach only looks at a piece of the puzzle and does not give you a full view of your ERP systems cost. Rather, if you want to know “how much does a new ERP cost.”, you should consider both numbers. Combined, they give you the true cost. You can calculate this by subtracting the total cost of ownership (TCO) over five years from ROI.
As you can probably imagine, calculating the total cost of ownership and the ROI is not as easy as 2+2. There are several factors that go into calculating both of these numbers. That is why we made this a two-part blog series. To make the information easier to digest, we will focus on TCO today and discuss ROI next week.
How to Calculate Total Cost of Ownership (TCO)
To calculate TCO correctly, you’ll want to use this formula. Purchase price + implementation costs + operating costs (for the next 5 to 10 years that the new system will be in use).
The first two parts of the formula, purchase price and implementation costs are fairly easy to define. Figuring the operating costs for the next 5 to 10 years is where things get a little muddier. A few things you want to make sure you include are:
- Future system customizations
- Your employees time and effort spent implementing the new system
Keep in mind, the costs I mention above are only the hidden costs associated with buying a new system. The flip side of that coin are the hidden costs that come with keeping an outdated ERP. Watch this ninety second video to learn more.
It’s true, some of the hidden costs we outline in the video are hard to calculate. But, they are still important factors to be aware of when deciding whether to keep or replace your ERP. With so much to think about, calculating the total cost of ownership for a new system can seem like a difficult task. But it doesn’t have to be. This TCO calculator can help.