How to interpret ERP quotations

Quotation documents from ERP and CRM vendors serve two purposes: they provide you with an estimate of the costs of your implementation, but they also give you a good way to evaluate the values and standards of the vendor. How should you analyze this document to maximum benefit?

Costs

Software, maintenance and support

Start with the obvious: how much are they quoting for the project? The least problematic component is for the software. If it’s priced on an up-front basis, you have an absolute figure that can be compared directly to that provided by other vendors. Alternatively it may be priced on a subscription basis – in which case it often includes maintenance, support and even hosting. Be careful to determine which of these are included, in order to attempt like-for-like comparisons.

Most companies that are comparing subscription to up-front software costs use three to five year total costs for the comparison.  For example, one vendor offers a software cost of $100,000 and annual maintenance and support of $22,000, whereas a second vendor offers a subscription of $4,000 per month. On a three year total cost comparison the first vendor will end up costing $166,000 compared to $144,000 for the second vendor. On a five year comparison the numbers are $210,000 versus $240,000. The longer the comparison period selected, the more likely it is that subscription will be higher than up-front costs.

Strictly speaking, looking at total costs in this way can only be an approximation, and you should really use Discounted Cash Flow calculations to make these comparisons. If you are just comparing differently timed costs, you should reflect the value of money to you: for example, if you are in a fast-growing industry with high profitability, having cash to reinvest is likely to be more important to you than for a cash-rich company with little chance to change turnover based on investment levels.

Maintenance covers the right to use the software, and to access updates – although frequently there will be a hidden or expressed cost for the services associated with the update. Support includes access to experts to resolve questions, and can come in many forms – there is a huge difference between support only available from a web portal of other customers versus a service level agreement where a vendor agrees to provide an answer to support within a given timeframe.

Hardware/hosting

The vendor may be quoting for hardware, particularly the cost of the server. Alternatively they may offer a monthly cost for hosting. Again be careful to establish what is included in the cost: is the server dedicated or shared, are other software solutions offered within the monthly cost or other costs (such as MS SQL Server licences), which managed services are included (typically only local backup, sometimes none), and what kind of security is offered, if any? What is promised in the event of hardware failure – are there clear procedures for what happens next?

Services

Comparing services costs between vendors is notoriously difficult, for several reasons:

Different services – each vendor may have a different view on what services are most effective. Typical examples of services that will not always be offered include user-specific documentation, business process re-engineering advice and even forms design. The clearer you can be in defining the project up front, the easier it should become to make the comparisons between service levels – you can, for example, tell vendors which services you expect them to quote for.

Division of responsibilities – a similar point to the last, with the same solution. Vendors can make different assumptions on who will do each piece of work – for example, will forms design be done with a training course on forms followed by company staff doing the work, or by the vendor designing all the necessary forms. The same considerations apply to data migration. Clearly if you want to prioritize your staff as much as possible to their existing roles, then you should be specific in telling vendors to cover these areas themselves.

Complexity of solution – implementing SAP, for example, entails significantly more complexity and therefore a higher service level than implementing Quickbooks. The scale of the solutions is different, including the number of features in each area, how long it takes someone to learn, and how many people are required to run administration features to support them. Even when comparing systems aimed at similar sized companies, there can be such differences of complexity. How can you tell, however, if a lower training cost in one quotation results from lower complexity or from a vendor cutting corners? There is no absolutely clear answer to this, but you should take into account the following factors:

  • during the demo, form your own view on the relative complexity of the solution versus the other solutions you are seeing
  • look in the quotation document for references to the level of services being offered. Vendors will frequently volunteer whether this is a “lean” implementation to meet your budget versus a rich implementation to ensure success, or somewhere in between
  • in the absence of clear written guidance on this point, ask the vendor for their range of implementation costs, from lean to rich
  • set a clear guide on what type of implementation you require when providing the briefing.

Your “ambition level” – if you list 50 reports that you believe you need, most vendors would form their own view on how many of those 50 are covered by the costs they are providing, based on an assumption of reasonableness. If you mean all 50, you need to tell the vendor to quote for all 50.

Travel and other expenses

Don’t forget to get an estimate of all other costs that will be incurred, including travel, accommodation and daily allowances. If these are expressed as per day figures, you will need to get an estimate of the number of days the vendor will provide staff on site.

Time and materials versus fixed price

It’s pretty rare to see fixed price offers, and generally they are worth considerably more than their time and materials counterparts. The average overrun on ERP projects is probably around 15-20%, so this gives a hint of the possible saving. However, if the project is not tightly defined at the time the offer is made, the scope for misunderstanding of what the offer covers is high. Read the offer document carefully to understand what the reseller intends to be covered. If it is still not clear, both you and the reseller would be well advised to work further on honing the definition, as otherwise the risk of project failure based on unmatched expectations is extremely high.

Hidden costs

It is not the vendor’s role to spell out to you the real costs of your implementation. For example, by far the highest cost of the implementation is not the software or even the implementation services, but rather the cost of labour of your staff. This can be seen very simply with training: for every hour of reseller labour paid for, you are paying for salaries for each of your staff in the room.

Use the following, rough rules of thumb to determine if your expectations are in the right ballpark. Industry research suggests that software (based on up-front costs or a three year payback) costs on average around 1% of the total sales your company makes in a year – suggesting that an average company pays somewhere around $10,000 in software for every $1m they’re selling per year. The total project cost is estimated at five times this figure, with hidden costs including internal labour, third party software and web services, hardware of various kinds, networking infrastructure, and all kinds of vendor services that pop up down the line if the vendor is less than clear up front.

What does the supporting document tell you?

The way a vendor communicates his proposal to you provides a wealth of clues about how the implementation will go. For example, if you receive an email with little more than a handful of figures (the costs for software, maintenance and support, implementation and possibly hosting), you have to ask yourselves why the vendor is communicating so little, and whether there is any likelihood that this limitation on communication will not repeat in the implementation itself.

First, how clearly do you understand what will happen during the implementation? Has the cost for services been broken down into constituent elements, such as project management, analysis, specification, build, installation, configuration, data migration, training, testing and go live handholding? These will give you the measures to make a comparison of the true complexity of the solution, and conversely if you have not been given such a breakdown, why not? Do you know how much of the work will be completed on site? Do you know where responsibility will be given back to your company to complete certain tasks? Do you know how long the work is expected to take (duration, not the quantity of hours)?

Next, what assumptions has the documented cited in arriving at the cost figures? What level of experience are they expecting of your staff? What type of involvement is expected?

Note that ERP is all about processes, and all about details. The way that the project is described to you is an indicator of the quality of implementation you can expect – of the quality of communication, of the courtesy in wanting you to understand what will happen, of the desire to complete a successful implementation and end up with a happy customer. Find out also who was involved in the preparation of the document, and whether they will be involved in your implementation.

This last point hints at one of the more important issues. Ask who will make up your implementation team – determine what level of experience each person has. Different components of work get different levels of benefit from greater experience: tasks that require less experience to be done well include forms preparation, data migration and training against a standard script, whereas tasks that benefit from greater experience include all types of analysis, configuration, non-standard training, and go live handholding.

Last, but not least, what is the overall level of professionalism of the document, and what kind of tone does it set? If a vendor is careless in their sales pitch to you, what do you think is the chance of them upping their game when they come to implement? Remember that the skills that a vendor brings to an implementation, combined with their methodology, is more important than the quality of the software if your implementation is to be successful.

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