Corporate financial wizards are expert at creating realistic expense budgets that project exactly how much will be spent on everything from paper clips to building a new facility and expanding into new markets. But even the best MBA analysts from the best grad schools have trouble accurately budgeting the cost and time for an SAP S/4 HANA installation whether it is for upgrading a legacy ERP software system or bringing a totally new one onstream.
Tales of massive cost overruns are legendary, often escalating into the tens and hundreds of millions of dollars above what was planned when budgets were developed. Likewise, there are horror stories aplenty of integrations that did not go well inside a business. While the problems are not limited to SAP S/4 HANA systems, it does seem to happen more often than with ERP software systems from other vendors.
As an attorney who negotiates and drafts contracts for ERP software system users, we have seen a trio of culprits: Customers reply too heavily on costs in a sales proposal to establish a budget; customers don’t understand the complexity of the size of the project which create many variables; and customers do not factor in the reality of the size of the organizational change that will be necessary to make an ERP implementation successful.
One or more of these usually come into play.
Strong Proposals, Soft Numbers
As is the case with Oracle, Microsoft, Infor or any other vendor, the SAP S/4 HANA sales team has one goal: Make the sale.
What happens is that the client team – a CIO, CFO, even the CEO – frequently rely heavily on the sales proposal to come up with a budget for the project and how long it will take to implement. But while an account manager has a financial incentive for closing a deal, that person has no incentive to provide a realistic price or timeline estimate. When looking at a proposal, remember two things that affect the actual, total cost:
- Type of business – A manufacturing company requires a more complex system than, say, an accounting firm or hedge fund. The more complicated your supply chain or your warehouse management systems, the more complicated (and expensive) your implementation will be.
- Third party software – Often, software from other vendors is needed to fully utilize the ERP software system. If required, this can add up to 35% of the total cost of the software that needs to be budgeted.
As a rough rule of thumb, an organization should realistically budget between 5% and 7% of its annual revenue on the total cost of acquiring and integrating an ERP system regardless of what is in the vendor’s proposal.
Digital Transformation Isn’t Easy, Fast or Cheap
The assumptions used to create an implementation schedule often are based on either incorrect or faulty information.
In our experience, this is one of the reasons why so many ERP software systems consume vastly more money and take months and even years longer to implement than planned. Understanding the organizational change that will be needed is more important than comparing proposals between SAP S/4 HANA, Oracle and Infor.
The eventual total cost isn’t so much the price of the software itself as it is internal factors such as the competencies of the staff who’ll be working with it, and where – and for what purposes – it will be used in the organization.
The bigger the transformation, the more complex will be the integration into the business. The factors involved include the experience of the people responsible for keeping the system functioning, the impact it will have on employees and suppliers, how extensive the change will be to business processes, the expanse of geography to be covered by the system, and the overall impact on the company.
- Functions – The more extensive the scope of the ERP software system, the more time it will take to integrate it and bring it online.
- Geography – The more spread out the end-users will be, the more complex the integration and implementation. Those that serve multiple countries with diverse business cultures increase the complexity many times and in many ways.
- Experience – Internally, if the team hasn’t implemented an ERP system previously, deploying it will take longer and require much more training. ERP consultants can help assess the situation and quantify the time needed.
- Change – The component that far too many companies overlook when implementing an ERP system is the need for a far-reaching change management program to be conducted as the system is being integrated. This enables everyone who will come in contact with the SAP S/4 HANA system to not only know what it does and how to use it, they will understand how they need to do their job differently.
Acquiring an SAP S/4 HANA ERP software system, or a competing ERP product from any other vendor, is a costly and complex process. But there are ways for senior management to plan more realistically for the overall expense as well as for the changes confronting the organization as a result of the new or enhanced system being integrated into its operation.
If your firm is beginning to consider upgrading a legacy system or acquiring a new one for the first time, feel free to call us with any questions about the contract with a vendor and integrator or for referrals to ERP consultants who can help in the process.