Image. Business Model and the Benefit of ERP systems (Arons, 2008)
Overview
The costs associated with implementing
Oracle ERP can be categorized as software, services and maintenance. During implementation, these costs are
largely dependent on the suite of services selected, the size of the firm, and
the number of system users. In the case
of IVK, the likely selection of ERP services will include Financials, Customer
Relationship Management (CRM), and Project Management. IVK is a mid-size firm with annual revenue
totaling $234MM, which would likely have approximately 195 users according to industry
averages (Aberdeen, 2007, p. 1). From an
accounting perspective, Oracle ERP offers the client the option of shifting IT
costs from fixed costs to variable depending on method of software deployment. (Depending on the position of the firm, one
option may be preferable to the other.)
As Gallaugher points out, customization and other factors can drive the
cost of ERP implementation into the hundreds of millions for large firms (2014
p. 922). In this analysis, we examine
the factors influencing fixed vs. variable costs, as well up-front and
recurring expenses.
Fixed Costs
If software is deployed on premise, licensing
fees are considered fixed costs associated with implementing Oracle ERP (Castellina,
2012, p.1). Although cloud options
are increasingly available, according to Castellina (2012, p. 2), 77% of
mid-size firms still opted for on-site deployment (p.2). Two options for purchasing software in this
method are through perpetual and term licenses.
Perpetual licenses incur a onetime fee that allows the client to
continue use indefinitely as long the requirements of the user agreement are
upheld (Oracle, 2014a, p. 8). Term licensing of one to five years is charged
based on a percentage of the perpetual license fee of a given product. The
Enterprise model pricing, which is best suited for IVK, is determined by the
number of modules or features selected under each functional suite. Each module
selected is then charged based on the number users. According to a 2007 Aberdeen
survey of mid-size companies, there can be discounts available for purchasing a
high volume of licenses, but this typically does not apply when the number of
users is less than two hundred (p.
3).
Variable Costs
If software is maintained in the cloud
or hosted by a third party, the licensing fee is charged as a subscription and
it may be considered a variable cost (Castellina, 2012, p.1). Other variable
costs include Oracle services, which average $0.88 for every dollar spent on
software (Aberdeen, 2007 p. 5). Services
include initial user training, user support, and other non-software expenses. The actual cost can vary depending on the
duration of implementation and increases in system complexity (Aberdeen, 2007, p.5). Much of the services costs will be incurred
during implementation, while others will continue as recurring cost. Lastly, maintenance fees can also be
approximated as a percentage of software cost, which averages 17.4% (Aberdeen 2007,
p. 5). As the firm grows and the demand
increases for modules and users, maintenance and services will increase
proportionally. (It is important to note
that these services and maintenance formulations are used for estimation based
on industry averages and are not necessarily representative of Oracle’s billing
methods).
Upfront and Reoccurring Costs
The primary upfront costs associated with implementing
Oracle ERP are software licensing and services.
Additional up front cost may include hardware and network upgrades
necessary to accommodate the increased number of users and bandwidth requirements,
as well as consulting fees incurred. Recurring
costs include additional software licenses and updates, required and optional
services, and regular maintenance. The cost estimate for the first 5 years at IVK and is based on the assumption that
195 software licenses will be purchased at implementation with ten additional user
added each subsequent year. Subsequent
year service costs are estimated at $0.88 per dollar spent on the additional
software licenses. Recurring maintenance
are estimated and at rate of 17.4% of total software licenses purchased.
Impact for IVK
Presently, IVK’s IT costs are roughly 8%
of sales with an increasing proportion of that budget being spent on
maintenance (Austin, 2009, p. 57, 63).
By implementing Oracle ERP, IVK may be able to stabilize costs
associated with infrastructure and maintenance.
The goal of improving their digital business model is to better support
their products and enhance the customer experience through the implementation of
this integrated, enterprise wide platform (Weill & Woerner 2014, p.
3). The actual cost of implementation
may vary significantly from these estimates, depending on the combination of
applications, services and deployment variables. However, the benefit of the investment will be
determined by the measure that IVK can increase revenues, decrease costs, and
advance the strategic use of IT towards sustained competitive advantage.
References
Arons, D. M. (2008). ERP & Performance. (KPMG IT
Najaarsevent). Retrieved 2014, from
http://www.compact.nl/en/articles/C-2009-0-Scheurwater.htm
Aberdeen Group. (2007, July). The total cost of ERP
ownership in mid-size companies. Retrieved
Austin,
Robert D., Nolan, Richard L., and O'Donnell, Shannon. The adventures of an IT
leader.
Harvard Business Review Press.
Castellino,
N. (2012, Decemember). SaaS and cloud ERP observations: Is cloud ERP right for
you?
Oracle
Corporation. (2014a). Oracle software investment guide. Retrieved
from
Oracle
Corporation. (2014b) Oracle E-Business Suite Applications Global
Price List Software
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