An Introduction to ERP Systems

 

What is ERP and why is it so important?...

 

Let's start with the basics.

An intro to ERP systems for beginners

WHY ERP FUNDAMENTALS?

In 2019 Resulting conducted some research into the SAP skills gap that existed in the marketplace. The mass migration to offshore outsourcing by many SAP customers in the mid-2000s saw local resources being swapped for offshore low cost delivery models.

This mass offshoring has resulted in a dearth of home-grown talent to fill the shoes of the retirees leaving the industry.

We can only assume the same situation across all ERP vendors.

There’s a huge opportunity for graduates to join the industry and for people to cross train and fill the skills gap. We are passionate about ERP, it’s how we’ve made our living.

We want to attract new blood to the industry. We want to prick interests and ignite a spark in you to learn more. We want to spread the work about what ERP is and why it’s important.

That’s our vision and the reason we’ve put this content together based on our knowledge and experience. It’s a starter for ten, a stepping stone to understanding ERP.

Who knows it might make you curious to know more and realise there’s a whole new world out there to investigate. The opportunities are there, you just have to know where to look. There may be a whole new career path waiting for you, you never know!

WHAT IS ERP?

We take for granted a lot of the things that go on around us and simply accept that some things just ‘happen’. So just pause for a moment and get curious about some things you take for granted around you.

  • How did that Amazon parcel arrive at your house within 12 hours?

  • How does my supermarket know what to replenish in each store?

  • For that matter, how do barcodes know what price to use?

  • If you order a new car, how do they order all those parts even if you choose different options?

  • If a train breaks down, how do they organise engineers and parts to fix it?

  • How is my electricity or mobile phone bill produced?

The answer is that these companies use technology.

They have systems that help them organise and run their complex businesses.  

Everyone knows that, right?

But what you might not know is that these systems are often very similar. There are a few standard systems that businesses install and then tweak to suit the way they run.

These standard systems are called ERP systems. Companies from Amazon, Adidas and Apple to Unilever, Vodafone and Volvo all run the exact same ERP system. ERP is the technology backbone that nearly every business relies on to do what it does. It touches every part of every business. ERP systems record every product and service that a company buys - this is purchasing. 

This includes deciding what to buy, who from, how much to pay - and approving that the purchase can be made.  

After all, not everybody can simply buy stuff on the company’s behalf. ERP systems record every item that companies have in stock - from receiving them, to storing them, to moving them around the business, and ultimately loading them into machines as raw materials or onto trucks as finished goods. This is Inventory management. ERP systems record everything that companies make - what raw materials were used, the labels printed on to products and packaging. 

Manufacturing obviously varies massively depending on the field that the company works in - and some companies don’t manufacture at all. ERP systems record sales activity, from a customer placing an order, through to delivering the product or service, and even on to shipping and transportation and ultimately billing for them.

This is Sales and Supply Chain Distribution and certain industries have other needs. ERP systems allow companies to order repair parts for machinery and record when they were fitted and by who.

This could be the company’s own machinery, or products that they have sold and need to then service and repair - like aeroplanes. This is maintenance.

All of these things involve finance. The cost of buying things and making them. The cost of energy and resources.

Plus, we need to charge customers and record that they have paid on time.

ERP systems record all of this finance activity. If you understand ERP then you understand how to make a business work, which is a skill that will always be in demand.

It’s just not a very sexy name, ERP stands for Enterprise Resource Planning. Enterprises are large businesses. Resources are the things they have that enable them to run (people, factories, products).

Planning is another way of saying “thinking about how we do stuff”.

History of ERP

ERP is a type of software that companies use to manage all of their information and activities in one place. The day-to-day activities like buying stock, manufacturing products, selling them, repairing them and recording finances. In the past, these activities were managed in separate systems.  

Companies had a purchasing system that was used to buy things, a manufacturing system that enabled them to take these things and make them into products,  a sales system that allowed them to sell these products and a finance system that tried to keep track of all the costs involved in these activities.

Each of these systems held its own information or data. For example, details about the finished product had to be held in the manufacturing system and the sales system. If the information changed in one system, then it had to be changed in all systems. Each of the systems needed to know that certain events had happened.

The finance system had to know that something had been sold so that an invoice could be sent to the customer and the stock system needed to know that there were less products in stock. The result was often that the right hand of the business didn’t know what the left hand was doing.

ERP systems were developed to bring order and control. Instead of separate systems, ERP became one system where all these activities were tied together and where information could flow seamlessly between them. In ERP this is called integration. This means that all areas of the business can share the same information and can see - in real-time - what is happening across the company. ERP is an Integrated system.

 

different flavours of ERP

We’ve discussed what ERP systems are and where they came from. However, there are different flavours of ERP systems for different areas of the business. ERP systems tend to cover the core areas of a business that involve purchasing, inventory, manufacturing, sales and finance, but there are systems similar to ERP for other areas too.

Customer Relationship Management systems (CRM). These are used to manage how a company interacts with its customers in sales and marketing. Human Capital Management (HCM) systems are used by companies to help manage and pay their people.

Let’s understand a little more about these. CRM or Customer Relationship Management refers to the systems used by companies for finding and winning new customers, growing their business and ensuring that existing customers are happy. Things like identifying new prospects, logging sales opportunities, managing marketing campaigns and recording new deals. Plus, after we’ve sold something - managing service issues like enquiries or complaints. Without customers you have no business. A good CRM system helps you find customers and keep them loyal.

Some ERP systems have CRM features built in,  but it's such a vital area that many companies implement specialist CRM systems which they then integrate with their ERP system. As well as customers, every business needs great people. HCM or Human Capital Management systems help companies recruit, develop and manage people. HCM systems hold all information about people in one place. Things like name, address, job title, manager and pay details. HCM systems make the recruitment processes structured and efficient for the company and their job candidates.

This is important as it is often the first contact a potential employee has with the company.

HCM systems also help with staff training and development - helping companies identify training needs and build learning plans for staff. One of the most important - and complicated   areas that HCM systems manage is Time, Attendance and Pay. This means that days worked, holidays and sick days are recorded and used to run monthly Payroll to ensure that staff get paid the right salary each month. Imagine what would happen if the HCM system stopped working. Just like CRM, HCM systems have to be integrated with ERP systems - so that all of the relevant information is connected - and can be reported on by the company’s management.

Future of ERP

The first basic ERP systems arrived in the 1970s with systems that covered individual areas like finance or inventory control. But the individual systems didn’t really speak to each other. They weren’t integrated.

Each system was like it’s own island. In fact the term ‘Islands of computerisation’ was used to describe this problem at the time. By the 1990s, the first integrated ERP systems arrived on the scene. These systems enabled companies to manage everything in one place.

So Finance, Inventory, Sales and Purchasing all happened in a single system. Each company had its own large computers called ‘servers’ with their own ERP system running on them. The problem of ‘islands of computerisation’ was solved.In the 2000s many software companies started to  build add-on solutions that make standard ERPs a little bit better for certain industries. The drive for mobility - providing access to ERP systems via mobile devices and tablets was the reason behind many of these add-on solutions.

The drive for paperless processing - moving printed documents to PDFs or emails required add-on solutions. E-commerce too - the ability to trade online - meant that the information in ERP systems suddenly had to be made available to the outside world. Things like online ordering, payment processing, checking account balances and stock levels were not things that ERP systems had originally been designed to do. So more and more add-on solutions arrived.

In many cases companies even built their own custom solutions to solve their own unique challenges. Once again, ERP systems were gradually becoming large islands surrounded by many smaller islands. Next, as the cost of computer storage and memory became cheaper, software companies created advanced tools that can analyse the data created in ERP systems. Advanced reporting systems called Data Warehouses and Business Intelligence tools arrived that enabled companies to get better insight into their sales, inventory, deliveries and finances.

Wind forward to the 2020s and with the availability of cloud based software, ERP no longer requires big data centres - most software can run in the cloud. But we’re back to the islands of computerisation again.

These systems need to talk to each other, in real time. The drive to digitise  to create a modern, connected world for customers and suppliers has become crucial for nearly every company in every industry.

The drive for Robotics and Automation - the ability to reduce the dependency on humans - which will drive future efficiency.

The move to the Internet of Things - the ability to talk to connected devices around the world - like GPS in trucks, or sensors on machinery, or smart meters that work out your electricity bill.

The uptake in Artificial Intelligence is the ability to make decisions based on complex calculations in real-time to improve business performance. ERP is going to be right at the centre of all of these things. In fact, it will be the central nervous system that connects all of these things and the data that drives them.

WHY IS ERP SO IMPORTANT TO BUSINESS?

One way to think about an ERP system is as the brain of the business. In our body, the brain controls all our different parts and tells them what to do so they all work together. The brain also takes in information and processes it so that we know how to respond. We’d be unable to function without a brain. In the same way, when a company gets to a certain size and complexity, it can’t operate without an ERP system.  

There are just too many moving parts for it to cope without a central system allowing every part to know what the other is doing. ERP integrates and connects all the information needed for the business to run smoothly.

Let’s imagine we run an electric bike company - Sparxycle. We need to develop new products, test them, manufacture them, and then get on with marketing and sales, plus manage our finances. That is a lot of activities to be doing at the same time and, if one area of the business is out of step with the others, the knock on effects could be disastrous.

What if manufacturing isn’t aware that marketing has a new campaign for the Sparxycle-Max with promotional advertising along the route of the Tour de France?

If manufacturing doesn’t know about the campaign, they can’t tell purchasing to order the lightweight frame material that the Max is made from. So, when customer orders pour in, there won’t be enough Max’s ready for the demand.

We’ve wasted our marketing investment and probably lost valuable Sparxycle customers to a different brand. Instead, in Sparxycle’s ERP system, the sales team creates a forecast of what they think will sell as a result of the Tour de France campaign.

This will trigger a plan of how many Max bikes to manufacture and when they’ll need to be ready for shipping.  

This, in turn, will work out which parts need to be purchased and, based on how long it takes for the supplier to ship them to us, when we need to order the parts.

By synchronising the information across all of these areas, the Sparxycle team is able to plan what needs to be done, fine-tune productivity, and run efficiency by ensuring activities are done at the right time in the right way.

Meaning happy Sparxycle customers and a healthy Sparxycle business.

ERP makes businesses more agile - with the business climate constantly changing, the ability to respond to these changes is vital. A good ERP system is flexible enough to adapt to changes in the market, changing customer demands and changes in legislation. A good ERP system is scalable, so it can cope as the business gets bigger and more complex.

To deal with this, ERP systems tend to be made up of different modules which businesses can implement to deal with different challenges. For example, Sparxycle needs to make their range of eBikes customisable, they might enable a ‘configurator’ module so that customers can build their own bikes online.

This might be switched on later when Sparxycle changes the way it’s business works - sometimes called it’s Business Model. Imagine trying to run Sparxycle on spreadsheets. It would be OK for a small volume of orders but the wheels would soon fall off as the volume of sales increase. ERP systems help improve efficiency and productivity as businesses grow. ERP systems streamline the way businesses run by storing all the information they need in a single place rather than different areas of the business having their own ‘version of the truth’. 

We’ll talk more about ‘master data’ in a later module, but ERP systems are used to store information like...

  • The products you buy and sell

  • The way you make your products

  • The customers you sell to

  • The suppliers you buy from

  • The prices you pay for goods and sell them for

Having this information stored centrally means that reports are more accurate so the business knows how it is performing. It also means that the different areas of the business can work together much more easily as they are all using the same information.

WHAT OTHER IMPROVEMENTS DO ERP SYSTEMS BRING?

ERP systems improve collaboration. A good ERP system can eliminate inefficiencies and waste to enable businesses to thrive and flourish. This means companies can keep up with demand, have the right products or services available for customers at the right time and have full visibility of how they are performing. Sparxycle’s owners know that they can only grow if their business is profitable.

A good ERP system saves money by eliminating mistakes and waste like our Tour de France promotion example.

Over time, the information in an ERP system provides the business with useful trends that help them improve the way the business runs.

This could lead to more efficient manufacturing, cheaper raw materials, more accurate pricing in certain markets, and targeting certain groups of customers who are likely to spend more. Benefits like these are called Bottom Line if they reduce costs and Top Line if they increase sales.

ERP also Improves security. Companies are often under threat from cyber criminals - this can come from both outside and inside the company. A central ERP system enables businesses to focus on protecting themselves in one one place rather than across lots of different systems.

The security features within ERP systems also mean that people within the company can be limited to what they are able to see and what activities they can do. For example, it is possible to limit who can create orders or pay suppliers to reduce the risk of fraud. ERP systems also log every activity that takes place, meaning that if there is a security breach it’s easier to figure out who has done what.

WHO USES ERP?

So now we know a little more about what an ERP system does and the origins of ERP. We also know why ERP systems are important to businesses.

Let’s look into what kind of businesses use ERP systems and why. Initially ERP systems were mainly used by massive multinational corporations. These were the only companies who could afford the software and the computing power to run early ERP systems.

Over the years the ERP Ecosystem has changed and ERP has become more accessible to smaller organisations as well as the large multinationals. The likes of Amazon, Apple, Walmart, Netflix, Tesla, General Motors, Kraft Heinz, Nike, Disney, L’Oreal, Facebook, Proctor and Gamble simply could not operate without ERP.  

As consumers, we couldn’t function without ERP. Our online order to Amazon goes into an ERP system once it’s placed on their website. ERP knows how much stock is available and when it can be delivered.

ERP contains the history of what we have bought previously or what customers like us have bought previously so similar items can be suggested to us. ERP tells the warehouse when to pick the stock.

ERP schedules the van to deliver our order in the quickest, most efficient way and allows us to sign for it. If we don’t like the product ERP enables us to return it and processes a refund.

ERP will order more stock from suppliers if they are running short. It will take into account external information like events and the weather or the season to adjust replenishment levels. In the background, the financial part of the ERP system processes payments from customers, payments to suppliers, payments to employees and credits for returns. 

But it’s not just massive corporations who use ERP systems.  

As the technology has become more affordable and the value of ERP has been recognised, smaller enterprises in every sector use ERP. Banking, government, universities, retailers and energy companies all have their own ERP systems to help them do what they do in their particular industry sector.

It's doubtful that there will be a single day where your life is not impacted by an ERP system in some way, shape or form.  

You just don’t know about it. In case you were wondering, here are some examples of how ERP systems are used in different industry sectors.

 

ERP IN AEROSPACE

Aerospace is the design and manufacture of things like aeroplanes, helicopters, rockets, missiles and spacecraft.

Aircraft builders have really specific requirements and the industry is a great example of why some ERP vendors specialise their products. The safety implications mean there are strict rules and regulations in aerospace that have to be followed.

If the TV you’re watching is faulty, it’s annoying. If the plane you’re flying on develops a fault it could well be fatal. Because of this, it’s vital that aerospace manufacturers have an ERP system that records details of testing at different checkpoints along the production process.  

There’s a requirement to hold records of who has worked on what part of each plane, who tested it and who signed it off.

There’s also requirements to hold unique serial numbers of every part and detailed information about the raw materials that were used to make them. 

If a delivery of aluminium is found to have been faulty, it’s vital that we can identify all the aircraft parts that were made out of it and which exact planes the parts were fitted on. We need full traceability. If we can trace the parts and pinpoint the aircraft then we can ground the planes and replace the parts, minimising the danger. Most industries don’t have these complex requirements so some ERP systems have been designed to solve this problem for the aerospace sector.

ERP IN AUTOMOTIVE

Manufacturers of cars, vans and trucks have to compete with many other brands and models. They also provide many different versions of each model they sell.

For example, Volkswagen produces small, medium and family sized hatchbacks and saloons as well as medium and large SUVs, the range is vast, something for everyone. Each car can be specified differently. You can customise the engine size, the wheels and alloys, the colour, and even if the car is left or right hand drive.

The combinations are huge and the variations complex. This means their production processes are complex too. Each vehicle is made up of thousands of individual parts which need to arrive at the right point on the production line at exactly the right time. Otherwise manufacturing stops to wait for the parts. It’s a global industry with components and cars being shipped all over the world. This means that an ERP system for this industry has to analyse and document activities that happen in businesses all over the world — often with complex partnership chains of suppliers.

The role of ERP in the automotive industry is to take the incoming information from all these different sources and make sense of it. Phasing out old models and bringing new ones in, and providing quality assurance over parts to make new, and repair used vehicles are also important factors of the automotive industry. Again, these are not ‘general’ requirements and ERP suppliers have responded by developing automotive specific features within their systems.

ERP IN PHARMACEUTICAL MANUFACTURING

The key focus in the pharmaceuticals industry is quality control and quality standards. Companies who make drugs have to work with government regulations and ensure that their products contain exact quantities of ingredients that are assembled in carefully monitored environments. By using sensors, ERP systems can monitor temperature, humidity, and air quality. They can also monitor the production machinery to ensure that they are adding ingredients at the correct rate, in the right quantities, and that the products or packaging aren’t damaged.

Pharma companies also need to put serial numbers on the millions of packs of drugs they produce, and trace them from the factory to the drug store.  The ability to record, store and access this vast amount of information - and do it in a secure way - is vital to pharmaceutical manufacturing. Similar to pharmaceuticals, food and beverage manufacturers also need specialised ERP to support the creation of high quality, safe products. Again, there’s the requirement to monitor the temperature of production areas and exactly what ingredients are going into each product.  

There are also specific needs for different types of manufacturing - like alcoholic drinks, meat and seafood processing, fresh produce handling, confectionery production and more.  

Obviously, full traceability is needed for product recalls, shelf-life management to ensure ingredients are ‘in date’ and there are factors such as promotions and special packaging for different markets to consider.

These are just some examples of how different manufacturers have different needs from an ERP system.

There are many more examples of different industries each with their own requirements - like oil and gas production, telecoms and electronics. But ERP systems are not only used in manufacturing, they are used in service sectors where nothing is produced.  

Industries like banking and financial services, retail, education, healthcare and even local government all use ERP systems to operate.

Go into any supermarket and look at the number of products they stock. It’s mind boggling.

Now just think about one supermarket product - say coffee.

There’s instant coffee, ground coffee, coffee beans, coffee pods, coffee capsules, coffee sachets, ready made coffees, caffeinated, decaffeinated, light roast, medium roast, dark roast, extra dark roast .

The combinations and choices are vast. That’s just a quarter of one aisle in a store that may have 30 aisles. And that’s one store - Tesco has over 3,000 supermarkets in the UK.

Now factor in price changes, promotions, new products being launched, old products being retired. The amount of information is truly staggering.

Now think about payment - cash registers,  credit cards, and even coupons! That’s just the front of store operations. 

Sales need to be analysed to see what’s hot and what’s not, deliveries need to be planned to fill the shelves back up with just the right amount of stock - too little and you’ve missed a sale, too much and you’ve literally nowhere to store it. Orders need to be placed with suppliers - both local and international - to ensure they have enough time to produce and deliver to vast warehouses. They even need to consider things like the weather - sausage sales go up if we get hot barbecue weather. Or events - beer sales go up during a world cup. Or TV programmes - if a celebrity chef uses fresh basil in a recipe then sales will rise.

Plus, some products will go stale in a matter of hours. No wonder retailers rely on ERP systems to manage all of this information, and to manage  these complex challenges.The amount of information in each area of the business from ordering stock from a supplier to selling it to a customer and all the steps in between needs all areas of the business to be integrated. Otherwise it’s empty shelves and dissatisfied customers who will soon move on to another supermarket who can get it right.

Universities and research facilities are big and complex organisations. They have thousands of students and staff to manage - each year they have new admissions, existing students returning and graduates leaving. The associated information has to be managed securely and efficiently. Then there are all the facilities to manage and maintain - offices, restaurants, lecture theatres, sport facilities, car parks and student accommodation.  

They also have complex regulations to follow in order to meet the correct criteria for funding they receive from government, councils, industry and research bodies. Educational establishments find  ERP systems the best way to manage the many logistical aspects associated with their day-to-day operations - ordering equipment, providing goods and services to customers, organising events and administration of courses.

They also need ERP to track all the financial aspects of running a large organisation, using built-in audit trails and centralised access to all financial information.

Manufacturing companies make physical products - processing materials and transforming them into something else. Things really took off in the 1990s when integrated ERPs were introduced and all the activities the business does - accounting, purchasing, sales and inventory can be managed by one system.

In the years since the term ERP was coined, the ERP industry has undergone major changes and the focus of ERP systems has also expanded.

ERP providers still cater for manufacturers but they have moved on from just providing ‘one size fits all’ solutions to specific products for specialised industries.

As well as this, in recent years, ERP has also branched out to support industries other than manufacturing to provide these businesses with a single system that does everything.

WHO ARE THE MAIN ERP SOFTWARE COMPANIES?

The term used for the companies who sell ERP Software is ‘ERP Vendors’. Vendor is another name for seller or supplier. There are hundreds of ERP software vendors who offer at least one, and in some cases, a range of ERP products for different industry sectors and company sizes. ERP systems can be broken down into three groups or ‘tiers’ to suit different levels of size and complexity of business.

Tier 1 vendors are those who’s ERP systems are built for the biggest businesses in terms of company size - think revenue, staff and global reach.

These ERP solutions service multinationals, global players, complex organisations with multiple entities and complex ways of working. The most common Tier 1 ERP systems are made by SAP, Oracle and Microsoft. Tier 1 ERP systems need specialist consultants who will configure and build ERP systems to meet specific customer needs. They’re also the most expensive ERP systems. Many of the world’s biggest brands use Tier 1 ERP systems.

Tier 2 ERP systems are designed for small to midsize businesses whose business needs and organisational structure are less complex than tier 1. They may still have single or multiple locations, but will be smaller in terms of revenue, staff and global reach. Their business model is likely to be more straightforward and ways of working less complicated. Examples of vendors you find operating within the tier 2 space are Netsuite and Sage. 

Tier 3 are built to service smaller organisations sometimes with specific business needs. Many of the Tier 3 ERP vendors provide solutions to specific niche business problems. These are low cost products that can be quickly and easily deployed. Depending on the solution they provide these products may be used alongside larger ERP products to resolve a specific problem.

Quikbooks and Sage 50 are examples of Tier 3 vendors. Some businesses are so unique that an off the shelf ERP system may not meet their business needs. They may choose to develop either an in-house ERP solution or heavily customise an existing ERP solution.

erp-vendor-selection

 

There is a market for specialist or niche vendors, some vendors may specialise in out of support ERP solutions that organisations wish to keep active and are fit for purpose.

Other niche vendors may specialise in specific solutions such as cutting edge warehousing technology or may focus on a specific industry such as pharmaceuticals or aerospace.

Choosing an ERP vendor

When choosing an ERP vendor, many factors need to be considered which include; 

  • Cost

  • Fit for purpose

  • Adaptability

  • Future requirements capability

  • Ongoing support costs

  • Compatibility with existing systems

As the cost of Tier 1 ERP software is so high, Tier 1 businesses often choose to use specialist companies to help them choose the right software. We’ll discuss this more in the next session.

 

HOW MUCH DOES ERP COST?

What are the 3 main costs of ERP systems?

This is a question we’re going to revisit a few times throughout this course. The cost of ERP depends on a lot of factors which we’ll break down and explore. The basic costs can be broken into 3 parts:

ERP Cost 1: Software Licensing and Maintenance

This is what you pay to the software provider to access ERP software and for them to provide updates and fixes over time. Typically companies pay a licence for every ‘user’ of the ERP system - although there can be other ways that ERP is licensed too.

If you’re a large company with thousands or even tens of thousands of people accessing ERP, the cost can be huge. For smaller companies with a few employees, the cost is obviously lower. Add to this the fact that big company ERP systems - which we call Tier 1 systems - are the most expensive.

Tier 2 and 3 systems that tend to be used by mid-sized and small companies are cheaper. This means that the costs for the bigger companies are very high. While the cost of smaller companies can be very low. Take an example of a company with 5,000 staff using a Tier 1 ERP system that costs £2,000 per user plus 20% per year in maintenance. That’s £10m up front and £2m per year. Over 5 years, that’s £20m.

At the lower end of the scale, take a cloud based system for a company with 100 staff costing £50 per month to subscribe to their ERP system. That’s £60,000 per year or £300,000 over 5 years.

ERP Cost 2: Infrastructure (aka Cloud)

Tier 1 and 2 ERP systems often need to run on large computers called servers. The more users you have and the more data you hold, the more servers you need. In the past, companies bought their own servers and kept them in large buildings called data centres with electricity, fire protection and cooling systems. Plus, they had to keep a whole spare system alongside just in case something went wrong - a fire or a disaster. These Disaster Recovery systems almost doubled the cost of servers needed to run an ERP system.

Now, Tier 1 and 2 systems tend to run on cloud based servers run by companies like Microsoft, Google and Amazon Web services. This means that security and disaster recovery are part of the service. And that adding new servers as the company grows can be done at the click of a mouse.

Plus, companies can switch on additional services at their busiest times to buy more processing power. For example if there’s a certain monthly task that needs 10 extra servers, cloud server providers - sometimes called Hyperscalers - can rent the extra power needed just for the time it is needed. Although cloud services are cheaper, infrastructure is still an expensive component for Tier 1 and 2 systems.

Even modest Tier 1 systems can cost £30,000 per month to run.Another £1.8m over 5 years.

Native cloud ERP systems don’t need additional infrastructure because the licence for the software includes the infrastructure.These systems have no additional infrastructure costs because the cost of servers is bundled with the licence cost.

ERP Cost 3: Experienced People (aka ERP Consultants)

The largest cost associated with ERP is the cost of people.

This is because designing, building, testing and supporting complex ERP systems is a highly skilled job.

The skills span both business knowledge - to understand how the ERP system will make the business run efficient and achieve strategic goals, and technical knowledge - to make the software work the way it should.

According to research website IT Jobs Watch (UK), average ERP salaries range from £55,000 for an ERP Analyst to £85,000 for an ERP Architect.  These salaries can be even higher for niche ERP software packages.

Daily rates for contractors or consultants range from £600 to £1,200 per day.

It is easy to see how quickly the cost can stack up for a large implementation project.

  • A team of 5 people for 6 months at £800 per day is £480,000.
  • A large ERP project might have 100 people for 1.5 years.  That’s £29m in people costs alone.

Add on support once the system is live and the costs can be eye watering.

But large and small companies invest in licences, infrastructure and people for a reason - a well implemented ERP system delivers slick, profitable business processes.

Next: Understanding ERP Business Processes

Understand what business processes are and why they matter.