Why ERP vendors don’t gouge you up front

· 3AG blog,erp

Traditional ERP vendors may bleed client organizations dry in the long run but they never do so in the early stages of adoption and implementation—because they don’t have to. They will more than make it up in backend maintenance and service.

Most people are now familiar with the Software-as-a-Service (SaaS) business model. SaaS allows subscribers to aquire services on a monthly basis instead of as single, one-time license purchases. There are many benefits for SaaS subscribers: Initial costs are low or zero, there are minimal or no installation requirements, and SaaS is generally scalable and easy to use. Regardless of industry or specific SaaS offering, these are the core features that make it such an appealing and effective service model.

Implicit in the contract between SaaS vendors and end users is the understanding that SaaS companies will continue providing quality products and service, including regular updates, to the companies who need them. Any SaaS service worth its salt will improve the longer it is used; this is what make SaaS so powerful. If this contract is broken, if the service does not become more effective month after month, users can simply cancel their services without early cancellation fees or other fines. It’s in SaaS vendors’ best interests to ensure that what they’re selling remains worth buying.

Traditional ERP vendors operate similarly to SaaS providers in key ways—with one crucial exception. Purchasing an ERP system costs a lot of money up front. Long before our current concept of SaaS existed, ERP vendors were extracting regular payments from their clients in the form of maintenance fees—but after having been paid the enormous adoption fee they’re (in)famous for. This essential difference keeps the power of this business relationship firmly in ERP vendors’ corner—which is not good news for organizations looking to ERP to either simplify processes or reduce costs.

Maintenance fees account for approximately 50% of ERP vendor revenue. This is a stunning figure, in part because a significant component of ERP vendor revenue comes from third-party system integrators. Despite earning license fees for their products and outsourcing installation and management to other companies, ERP vendors rake in the money on every deal they sign and maintain. What tends to be sold as a single cost to businesses like yours ends up being a strong double revenue stream for ERP vendors.

Aside from working with a SaaS-native ERP vendor (and there are many out there), how can companies make sure they don’t buy a product they’ll regret for years to come? To answer this, we must first consider how these sneaky and generally unending maintenance fees become an issue in the first place.

Why companies pay so much in ERP maintenance

Maintenance charges aren’t a complete scam; occasionally, there are legitimate reasons for them, which may include:

  1. support (a term so broad and vague, it can encompass any number of expensive add-ons, new services, etc.)
  2. training (to use the one-time ERP system that was meant to “solve everything” immediately, for example)
  3. <standard corporate-speak euphemism, the specifics of which are defined by industry; in Marketing circles, “Delivering outcomes” is one of the worst offenders>
  4. software upgrades
  5. changes to business processes, such as redesign

Of the above, one could argue that only software upgrades and business process changes are really legitimate. And even software upgrades are questionable, as they can slow down or irreparably damage your existing ERP implementation.

Changes to existing business processes, on the other hand, comprise a legitimate expense you should be prepared for. An ERP codifies existing business processes, which means that if these processes are changed, you need to update your digital version of them as well; not doing so can cause data misalignment, which can cause serious production or revenue harm during crucial moments such as inventory or high-volume work periods.

Should an ERP implementation be so fragile that 50% of what you pay for it goes towards changing your existing business processes? Of course not. Yet, one survey discovered approximately half of all companies required moderate to substantial changes to their ERP post-installation to update business processes, analytics, business rules, business model structure, and user permissions; these alterations required 20-60 person-days of work each time.

Significant changes to an organization (like acquisitions) obviously require significant effort. Integrations of old data systems can also take time—but weeks, not months. Changes that improve business processes and/or reporting quality should also be encouraged. However, if such changes are so disruptive their costs outweigh their benefits, there is a problem.