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Blowing the ERP Budget
Thursday, April 18, 2013

Statistics are reporting that 100% of companies exceed their ERP project budgets by an average of 25%. Why? The answer is pretty simple. Not enough work has been done upfront to establish what a reasonable budget should be. Even companies that believe they have researched ERP thoroughly have fallen into the budget over-run trap.

Companies that set a budget figure to be allocated for their ERP system without actually looking at the amount of work that has to be done and determine if they can afford the software component of the budget find out during the ERP project phase that, in order to get a return on the technology, the money has to be spent anyway. The only issue is the money isn’t budgeted for and the cost blow-out impacts company results.

Typically all of the areas glossed over or not identified at the project justification stage will surface during the project stage causing project disruption and cost blow-outs. Some activities that impact the ERP budget are:

Data Clean-up - At the justification stage estimates and assumptions will be made on the time and resources required to clean-up the data for transfer or keying into the new system. When the project starts resources tend not to be available in the time scale required or the amount of resource allocation was grossly underestimated. The only solutions here are to allocate more resources exceeding the budgeted amount or take shortcuts which will affect the systems operations downstream.

System’s Training - Software houses include an element of training as part of the purchase contract. This is usually carried out up-front far too early for people to be able to use the software and by the time the system goes live retraining is required or chaos results. The retraining is added to the cost.

System’s Modifications - The constraints on the amount of money that can be spent on software typically results in some form of compromise on the software actually purchased. The problem with this is the money will be spent anyway on modifying the software to do what the company requires to process effectively. Modifications are costly and has downstream issues of maintenance and upgrade support.

Process reengineering - Often internal processes need to be changed to enable to the maximum benefits from the technology. If this was glossed over during the justification stage then the company is left with two choices. 1/ Undergo the process reengineering adding to the project cost or 2/ Not undertake the reengineering and not get the benefits from the technology.

Excessive consulting costs - The ERP consulting/implementation industry is enormously profitable and over the past few years has positioned itself as indispensable and essential to effective ERP implementation. This is surprising as the percentage of non-performing ERP systems is around 70% although some statistics suggest 100% do not perform to original expectations. All of this despite the huge costs in consulting fees to make ERP a success. Any delays to projects for whatever reasons has a knock-on effect on consulting fees as they tend to extend the time consultants are on site commanding huge fees.

The cost pressures on all ERP projects are there from the beginning and whilst at the justification stage they can be hidden or glossed over they will surface during the project stage causing budget overruns and in some cases with disastrous consequences. There have been many cases of companies being financially wounded or have gone bankrupt from ERP projects that have been inadequately planned at the justification stage.

Companies can protect themselves by designing a model and identifying the activities required against the model and also selecting software that is able to process through the model. This may require a larger up-front cost component but at least it is known unlike post-purchase modifications that just bleed the company endlessly.

The cost blow-outs can be minimised or eliminated by working through the 26 steps outlined previously as this bullet-proofs the project against massive cost over-runs.