How To Budget For Enterprise Software

"So, how much is it really going to cost?" That's one of the first questions most executives ask when they are considering a new software purchase, especially those who are planning a major financial/enterprise resource planning (ERP), human resources/payroll, customer relationship management (CRM), or other enterprise software selection and implementation. The problem, as most financial executives have learned from experience, is that buying software isn't like buying a tangible product such as office equipment or a machine. There are about as many methods of pricing as there are software products, and every company's implementation issues are unique.

As unbiased software selection consultants, we are frequently asked by our clients to help them put together a budget for new software. Many have gone through this procedure before and want to avoid the problems/issues they encountered or they are doing a new type of investment and want some guidance. Based on this experience, we are going to share some of the fundamentals you should consider in your own budget planning. First, we'll review the seven basic elements of a software budget and give you some ballpark numbers that will help you get started. Then we'll discuss how to refine your budget as you move through the selection process. When we're finished, you should have enough information to put together a preliminary budget and have a good understanding of when you'll have more exact numbers.

SEVEN ELEMENTS OF A SOFTWARE BUDGET

To begin, you need to understand the main elements that should be included in a budget for enterprise software. We divide them into seven general categories: (1) Software License, (2) Database License, (3) Hardware, (4) Implementation Services, (5) Training, (6) Annual Maintenance, and (7) Internal Costs. Each of these elements has various subcosts, but initially you need to concentrate on the general categories only. Later on, as you get more information from the vendors, you'll be able to add more details.

We have created a software tier chart as a tool to help you get started (see Figure 1 and the Tier Chart sidebar). Decide where you fit, and use the numbers provided as a guide to help you put together your budget. Because the range of numbers is so wide, we'll discuss the seven elements of a budget in conjunction with the situations that will push your budget to the higher or lower end of the range.

Software License. Software license pricing models vary widely by vendor (see sidebar on p. 46), but, in general, if you are planning to implement a large number of functional modules (such as financials, manufacturing, distribution, payroll, human resources, customer relationship management) and have a high number of end users logging onto the system, you can expect to be at the higher end of the cost range. Also, if your company has multiple locations, this cost tends to increase. Conversely, if you are planning to implement just a few modules (say, only the financials) and have fewer users on the system, you will be at the lower end of the scale.

Database License. Because the database license is usually based on the number of end users that log into the system, companies with higher user counts will typically pay more. But if you already own a license for the database that the selected software runs on, you can essentially eliminate this line item in your budget. Here are some average numbers that you can plug into your budget for now: Tier 1, $75K; Tier 2, $50K; Tier 3, $20K; Tier 4, $10K; Tier 5, none.

Hardware. The nice thing about this element is that the cost of hardware has come down significantly over the last 15 years. You should take into account the possibility of new hardware for the server, any client machines, and infrastructure upgrades (scanners, wiring, etc.). If your hardware is up-to-date and you'll be selecting a system that's compatible with your current infrastructure, you can minimize your investment. But a move to a new server platform (i.e., HP3000 to Intel-based servers) will create a larger impact on the cost of the project.

Another factor that will impact your hardware investment is the need for redundancy and uptime. For example, a telephone call center that takes orders and needs to be up and running 24 hours a day will require a larger hardware investment with redundant servers. This has the effect of pushing you up to the higher end of the range. Here are some average hardware budget numbers for companies that have to do some upgrades but don't have to make wholesale changes to their infrastructure: Tier 1, $100K; Tier 2, $50K; Tier 3, $30K; Tier 4, $10K; Tier 5, $2K.

Implementation. In many cases, the cost to implement the software will be the biggest component of your software budget. Implementation is extremely difficult to estimate because it depends on so many factors. These factors include project management, the implementation consultant's expertise (understanding of your company, industry, and software product), the amount of business process reengineering required, and hourly rates. In general, the faster you implement the software, the lower the cost.

At the beginning of the budget process, implementation is estimated as a ratio to the software license cost, which means that for every dollar of software license cost, you can expect to pay X dollars of implementation. For example, if a software product generally has a 2:1 implementation ratio, for every $1 of software license cost, you can expect to pay $2 implementing it. Tier 1 companies generally have higher implementation ratios because of the complexity of the software and their implementations.

Using the software license cost you estimated, apply the following ratios to your implementation estimate. Adjust the ratio to take into account the complexity of your situation and the length of time you feel it will take to implement the software. Tier 1 would be a 2:1 ratio; Tier 2, a 2:1 ratio; Tier 3, a 1:1 ratio; Tier 4, a 1:1 ratio; Tier 5, none because these packages are usually self-implemented.

Training. Training is a critical element of your budget. You need to make sure that users are properly trained and that they don't begin to create spreadsheets outside the system. You will have various training options, including computer-based training, train-the-trainer, off-site, and on-site training. Your budget will change depending on the training option you select. For right now, use a percentage of the estimated software license: Tier 1, 15% of the software license price; Tier 2, 15% of the software license; Tier 3, 10% of the software license; Tier 4, 10% of the software license; Tier 5, none because users usually train themselves.

Annual Maintenance. This is the annual amount you pay