TCO or Total Cost of ERP Ownership is a significant factor that affects the ERP implementation strategies and decisions. Most of the ERP system buyers are aware about the importance of TCO but, they might be unable to understand the nuances of calculating it. ERP systems have some hidden costs, unlike the cost of tangible capital purchases. Calculation of TCO can help organizations to fairly compare different proposals and, to negotiate with vendors more effectively. By calculating TCO, organizations can know about the estimated financial expense including direct investment cost as well as hidden cost of the system. And, calculation of total cost of ERP ownership is beneficial to know about the cost involved in the different phases of ERP life cycle.

Implementation of an ERP system encompasses cost of procuring hardware and software, migration of data, support system, in-house training and several other hidden costs. TCO calculation can help organizations to understand about the cost of implementation as well as maintenance and upgradation of system in the future. Many organizations might fail to understand the importance of hidden cost of system. But, it is essential to know about it, because hidden cost might contribute 20 percent of total cost of ERP ownership and, in some cases hidden cost might be more than 20 percent. So, it is essential for business organizations to completely understand the TCO before moving forward towards implementation of the system.

Although, vendors would include all anticipated costs that would incur in the first 3 years of ownership in their TCO quotations, but there must be a distinction between services that are not being used by the organization. For example, if an organization is not interested in using CRM functionality in the first phase of implementation then, its cost must be excluded by the vendor from the package. A board room pilot can easily ensure that all costs are defined before the purchase of the package. Nowadays, software-as-a-service subscription model is very popular, because the monthly charges of this system are based on the number of users. Organizations planning to use SaaS instead of licensing ERP system must negotiate vendors for discounted rates instead of using ROI.

The total cost of ERP ownership comprise of basic software modules. But, vendors can provide add-on tools according to the business requirement. The cost of add-ons should be negotiated before implementation of the system. Expense on the hardware is a direct expense that can be easily computed but, it occupies a major chunk in the calculation of TCO.

Maintenance charges of ERP system is usually quoted by vendors on percentage basis. It is often due on the date of contract between vendor and the organization. Third party application is required in the first phase of software implementation. So, organizations must understand about the cost of using third party application at the time of calculating total cost of ERP ownership. The organizations must understand that TCO is not just about cutting cost. The IT platform with lowest TCO is not always useful for the organization because, software must be chosen according to the business requirements.

Read more about Cost of ERP Implementation. Also know Total Cost of ERP Ownership. Read about ERP Software Benefits.

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