Page 2: Cost Analysis

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
 
from http://www.meritalk.com/uploads_legacy/ whitepapers/Aberdeen-TCO_Midsize_COs_0707.pdf.
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?
Aberdeen Group. Retrieved from http://resources.cio.com/ccd/assets/46170/detail
Oracle Corporation. (2014a).  Oracle software investment guide. Retrieved from
http://www.oracle.com/us/corporate/pricing/sig-070616.pdf
Oracle Corporation.  (2014b)  Oracle E-Business Suite Applications Global Price List Software
Investment Guide. Retrieved from http://www.oracle.com/us/corporate
/pricing/applications-price-list-070574.pdf
Weill, P., & Woerner, S .L. (2014). Optimizing your digital business model. In What’s in store
for your digital enterprise? Retrieved from https://dl.dropboxusercontent.com /u/16264956/BUS577Chatham/BUS577%20Session%202%20Strategy/MITSloan%20CIO%20What%27s%20in%20store%20for%20your%20digital%20enterprise.pdf
 
 
 
 
 
 

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