September 21, 2023

Epic Law

The Law Folks

Total Cost of Ownership of ERP Software – Enterprise Resource Planning

ERP software package helps in the integration of all the functional units of an organization in a unified system to enable better performance and productivity. ERP implementation is very expensive and is installed based on long term perspectives. Extensive upfront planning is required before implementing or purchasing this complex software, otherwise it may lead to disastrous consequences. A thorough analysis of TCO or Total Cost Ownership helps to minimize the risks.

TCO encompasses the estimation of direct and indirect costs involved in the implementation of ERP like procurement of hardware and software, implementation and operational costs, annual maintenance, and other costs that may arise during the entire life cycle.

The main objective of TCO is to minimize the changes with reference to the main software, as frequent up gradation and customization involves heavy expenditure. It is wise to select the proper software that follows the basic and standard operations so that changes can be done only in extreme situations.

Various software tools are available to gauge the TCO of the ERP of an organization. These tools sharply focus on the best practices of ERP, and a disciplined approach to software deployment, which helps in the reduction of TCO. These tools effectively measure the direct expenditures, strength of the workforce and their performance, quality of service and also help to find out the strength and the weaknesses.

TCO helps in understanding and controlling the risks involved in the ERP application. Through necessary changes in the management, it helps in maximizing the organizational fiscal benefits and minimizing the risks.

Proper estimation of direct and indirect costs is the most critical application of TCO. While the direct costs are associated with tangible assets like expenditures based on client payments, procurement of computer peripherals, servers, internet, labor payment etc. These are easy to estimate and they generally don’t deviate too much from the budget. But the indirect costs are related to downtime in technology and staff, which are difficult to anticipate, and have significant contribution in the overall Total Cost of Ownership. Maximum indirect costs lie in the training and support system of the end-user. TCO analysis can be fruitful only if the direct and indirect costs are estimated properly.

TCO can be best realized by conducting simulations based on assumptions and anticipations of different critical situations.

It would be wrong to confuse TCO analysis as an approach to cost cutting. On the contrary, it helps in providing appropriate services worthy of the cost. TCO analysis does not bother much about the technological aspects. Its focus remains in the efficiency of operations, improvement of performance and the satisfaction of the users.