How to Use the “Rule of Five” to Estimate Your ERP System Implementation

Estimating the time and cost required for an ERP implementation is serious business. In my experience, unrealistic expectations surrounding implementation planning is one of the key root causes for ERP systems failures.

NOTE: This article was written while I was still with Panorama Consulting. Please note my new contact info at Third Stage Consulting!

Our 2016 ERP Report shows that a majority of organizations take longer and spend more money than expected to implement their ERP systems. While some may think that this is because organizations are grossly mismanaging their implementations – which could certainly be one of the causes of disappointment – a bigger root cause is that most organizations and project teams have unrealistic expectations to begin with.

Each organization has its own unique variables that will ultimately determine how much time, effort and resources will be required to be successful. However, there are a few general rules of thumb that can help determine those variables based on the actual results of thousands of ERP implementations over the years.

Below is what I refer to as the “Rule of Five” when it comes to estimating your ERP system implementation:

Expect to spend 5% of your annual revenue on your total ERP and digital transformation initiative

ERP vendors and consultants are notorious for underestimating the time and cost required to implement systems. This is sometimes due to the fact that overzealous sales reps are trying to lowball their estimates to get the deal done, while other times its simply due to the fact that sales teams do not truly know the costs required to make an implementation of their software successful.

Unlike the 1:1 software to implementation cost ratio that the industry typically uses to estimate implementation costs, our research over the last decade shows a remarkably steady, yet different metric when it comes to cost. The average organization spends a total of 5-percent of their average revenue on the total cost of implementation. This metric includes everything from software licenses, hardware upgrades, consulting fees, internal resource costs, customization, contingency costs and everything in between.

For example, a company that does $100M in annual revenue is likely to spend an average of $5M on their total cost of implementation. Similarly, a $1B company is likely to spend around $50M on their initiative. Vendors don’t like these numbers because they can create sticker shock while they are trying to close new business, but the facts can’t be disputed.

Keep in mind that most ERP vendors don’t have insights into these additional non-vendor costs, but they typically constitute a majority of implementation costs. Also keep in mind that larger organizations typically see percentages lower than 5%, while smaller organizations can see numbers a bit higher. This is largely because larger organizations have size and scale that enables a lower normalized implementation cost relative to their smaller counterparts.

Expect to spend a total of 5x your direct cost of software

Another useful metric is to multiply your software license costs by five to get your total cost of ownership. Again, as is the case with the 5-percent metric discussed above, this will lead you to a total, “all in” cost of ownership that includes everything that might be required to make your project successful.

For example, let’s say that you have negotiated an on-premise software license deal that results in a per-user cost of $3,000, although it will probably be higher if you don’t use Panorama to help with negotiations. Let’s also say that you have 1,000 concurrent (as opposed to named) users in the new system. This equates to $3M in software license fees.

While the typical ERP vendor, consultant or system integrator might get lazy and assume that $3M will equate to $3M in implementation fees, actual historic data suggests that your total cost of ERP implementation in this example will actually be closer to $15M, or 5x $3M. 

Expect to have at least five internal FTEs supporting your initiative

Some might suggest that ERP systems are fairly simple to implement or that the ERP vendor can handle most of the heavy lifting behind implementation, but our research shows that the average company has five internal FTEs supporting their ERP implementation. This does not necessarily mean that five people are committed 100% to the project; it may instead mean that 10 people are spending half their time on the project, or 20 people are spending a quarter of their time.

Unlike the above “rule of five” metrics, which have proven to be very consistent over time and with a small variation among different types of companies, the number of FTEs used by the average company fluctuates quite a bit. Larger companies have much larger teams, while smaller companies are able to scrape by with fewer.

Keep in mind that this number is what is what organizations actually used in their implementations, not what they should have used. Most organizations we survey indicate that they did not have enough internal resource support rather than too much. I always suggest using five FTEs as a minimum number – especially if you are a larger organization.

What about SaaS and cloud solutions?

The above data and examples may seem to primarily relate to on-premise ERP systems. However, we have also found that these numbers are strikingly consistent regardless of whether the technology is on premise or in the cloud.

How can this be, you might ask? It’s simple: the way technology is deployed and licensed is relatively immaterial to the overall cost of the total implementation. Even with SaaS and cloud ERP systems, people and process related issues are more than likely going to consume a majority of the effort, cost, risk and heartburn on your ERP project.

So, it’s pretty simple:

• ERP project costs = 5% of total revenue
• ERP project costs = 5x your software license costs
• Internal resources = 5 FTEs

Of course, these are average numbers, but they provide a good ballpark to start with. And note that the first two metrics, although both related to cost, will often give you two different numbers. Consider these two numbers a starting point for the range of your implementation cost.

Interested to see where your organization stacks up against your competition? Contact us for an assessment using data from our last several years of benchmarks!