If you would like a pdf of this article click How to Budget for Enterprise Software.

“So, how much is it REALLY going to cost?” That is one of the first questions most executives ask when they begin considering a new software purchase, especially those that are planning a major Financial/Enterprise Resource Planning (ERP), Human Resources/Payroll, Customer Relationship Management (CRM), or other enterprise software selection and implementation. The problem is that buying software is not like buying a tangible product such as office equipment, or a machine. First of all, there are about as many methods of pricing as there are software products, and secondly, every company’s implementation issues are completely unique.

As unbiased software selection consultants, we are frequently asked by our clients to help them put together a budget for new software. Based on this experience, we are going to share some of the fundamentals you should consider in your own budget planning. First, we will review the seven basic elements of a budget and give you some ballpark numbers that will help you get started. Then we will discuss how your budget will be refined as you move through the selection process. At the end of this article, you should have enough information to put together a Preliminary Budget and have a good understanding of when you will have more exact numbers.

The Seven Elements of a Software Budget

To begin, you need to understand the main elements that should be included in a budget for enterprise software. We divide them into seven general categories: 1) Software License, 2) Database License, 3) Hardware, 4) Implementation Services, 5) Training, 6) Annual Maintenance, and 7) Internal Costs. Each of these elements has various sub-costs, but initially you will want to concentrate on the general categories only. Later on, as you get more information from the vendors, you will be able to add more details.

We have created a software tier chart as a tool to help you get started. Decide where you fit and use the numbers provided as a guide to help you put together your budget. Because there is such a wide range of numbers, we will discuss the seven elements of a budget and the situations that will push your budget to the higher or lower end of the range.

1) Software License. Software license pricing varies widely by vendor, (see sidebar) but in general, if you are planning on implementing a large number of functional modules (e.g. financials, manufacturing, distribution, payroll, human resources, customer relationship management, etc.) and have a high number of end users logging onto the system, you can expect to be at the higher end of the cost range. Also, multiple locations tends to increase this cost. Conversely, if you are only planning on implementing a few modules (e.g. just the financials), and have fewer users on the system, you will be at the lower end of the scale.

2) Database License. Because the database license is usually based on the number of end users that log into the system, companies with higher user counts will typically pay more. However, if you already own a license for the database that the selected software runs on, you can essentially eliminate this line item in your budget. For most companies, here are some average numbers that you can plug in to your budget for now. Tier 1 – ($75K), Tier 2 ($50K), Tier 3 ($20K), Tier 4 ($10K) Tier 5 (None).

3) Hardware. The nice thing about this element is that the cost of hardware has come down significantly over the last 15 years. You should take into account the possibility of new hardware for the server, any client machines, and infrastructure upgrades (scanners, wiring, etc). If your hardware is up-to-date and you will be selecting a system that is compatible with your current infrastructure, you can minimize your investment. However, if you are moving to a new server platform (ie. HP3000 to Intel based servers), there will be a larger impact to the cost of the project.

Another factor that will impact your hardware investment is the need for redundancy and up-time. For example, a telephone call center that takes orders and needs to be up and running 24 hours a day, will require a larger hardware investment with redundant servers. This has the effect of pushing you up to the higher end of the range. Here are some average hardware budget numbers for companies that have to do some upgrades, but do not have to make wholesale changes to their infrastructure. Tier 1 ($100K), Tier 2 ($50K), Tier 3 ($30K), Tier 4 ($10K), Tier 5 ($2K).

4) Implementation. In many cases, the cost to implement the software will be the biggest component of your software budget. Implementation is extremely difficult to estimate because it depends on so many factors. These factors include project management, the implementation consultant’s expertise (understanding of your company, industry, and software product), the amount of business process re-engineering required, and hourly rates. In general, the faster you implement the software, the lower the cost.

At the beginning of the budget process, implementation is estimated as a ratio to the software license cost. This means that for every dollar of software license cost, you can expect to pay X dollars of implementation. For example, if a software product generally has a 2:1 implementation ratio that means that for every dollar of software license cost, you can expect to pay 2 dollars implementing it. Tier 1 companies generally have higher implementation ratios due to the complexity of the software and their implementations.

Use the software license cost you estimated and apply the following ratios to plug in your implementation estimate. Adjust the ratio to take into account the complexity of your situation and the length of time you feel it will take to implement. Tier 1 (2:1 Ratio), Tier 2 (2:1 Ratio), Tier 3 (1:1 Ratio), Tier 4 (1:1 Ratio) Tier 5 (None – Usually self implemented)

5) Training. Training is a critical element of your budget. You need to make sure that users are properly trained and they do not begin to create spreadsheets outside of the system. You will have various training options including: Computer Based Training, Train-the-Trainer, Off-Site, and On-Site training. Your budget will change depending on the training option you select. For right now, use a percentage of the estimated software license. Tier 1 (15% of Software License), Tier 2 (15% of Software License), Tier 3 (10% of Software License), Tier 4 (10% of Software License), Tier 5 (None – usually self trained)

6) Annual Maintenance. This is the annual cost that you pay the software vendor to develop new functionality, technology, and generally keep the system updated. Some vendors also include upgrades and high-level technical support. When you make your final selection, be sure you understand the services that are included as you may need to purchase an additional support plan. You can expect to pay 18-25% of the software license cost annually. For purposes of this initial budget, use 20% as a rule of thumb for all tiers except tier 5 where you will just purchase updates as you need them. Expect to begin paying annual maintenance in the first year during implementation, unless you are able to negotiate a different arrangement.

7) Internal Cost. Unfortunately, the internal cost that companies elect to include in their budget is so unique that we cannot really provide an estimate. Generally, companies estimate billing rates and calculate the number of hours they expect to be taken away from the normal daily staff activities. You may also include such things as:

a. Duplicate work effort (e.g. data entry to multiple systems during test phases).
b. Time required for conference room pilot testing.
c. Lost productivity for the duration of the project. Some team members may spend up to 80% of their time on the project for the first 1—3 months, and then 50% until completion.
d. Temporary work space to hold project team meetings, product demonstrations, conference room pilots, or house the implementation team.
e. Travel expenses for remote team members
f. External subcontractors.
g. Temporary staff to maintain current business processes.
h. Overtime, bonuses or other incentives to reward individuals involved in the selection and implementation process.

You should now have a good idea to start your budget that will put you in the ballpark for your software implementation. Although some companies may spend more in one category than another, every company should plan on at least some cost in each of these areas. As you go through the selection process, the detailed costs will come to light and we will now discuss how and when you can refine these initial budget numbers.

Budgeting – An Iterative Process

As we mentioned earlier, you will not have all of the information at the beginning of a software project to put together a firm budget that will take you through the implementation. This means that budgeting is really an iterative process and you will end up with 4 main iterations as you go through the selection process: 1) Preliminary Budget, 2) Short List Budget, 3) Quoted Budget, 4) Negotiated Budget.

1) Preliminary Budget. The Preliminary Budget is the budget that we have focused on in this article and is created before beginning the selection project. Most companies use this budget to gain executive approval and as a benchmark for the project.

2) Short List Budget. After you have conducted requirements analysis, completed the initial research of the software vendor market, and decided on a Short List of 3-4 software vendors, you can refine the budget with the numbers and estimates you receive from the finalist vendors. You should create a separate budget for each of the 3-4 options. This not only allows you to include some more details, but also helps you compare the cost of the vendor options available to you.

At this point you are still getting high-level estimates from the vendors. They typically try to make these estimates as low as possible during the selection process and may underestimate what it will really take to license and implement the software. Take their estimates and apply some realism to the numbers based on what you know about your company. For example, if you know that your implementation will probably be difficult and complex, you may need to increase the project cost of implementation. On the other hand, if the vendor has included functional modules in their initial pricing that you will not implement, you can reduce the software license cost.

3) Quoted Budget. After review of the Short List vendor proposals, you should conduct scripted software demos with the vendors. This serves two purposes: 1) it allows you to compare the software products equally, and 2) the vendor gains a much better understanding of your company and the work it will take to implement. When you make your final decision (after the demos and any final due diligence - including user visits, follow-up clarification, etc.) you can get a detailed quote from the selected vendor. They should include all of the costs that will be part of the solution including any 3rd Party functional modules needed, and a more detailed implementation estimate.

4) Negotiated Budget. After receiving the Quoted Budget, you will enter into final contract negotiations with the selected vendor. The final contract will form the basis for the detailed Negotiated Budget and will include finalized pricing (including discounts that are almost always negotiated into the contract) for the software license, hardware, and annual maintenance. Unless you negotiate a fixed price bid, implementation and training will still be an estimate and will change as you go through the implementation process.

Unfortunately, you won’t know the actual cost of the project until after you have completed the implementation and are up and running. But as you go through the software selection process, you should be able to gradually refine your Preliminary Budget until you have a Negotiated Budget that should be very close to the final cost of the project.

Conclusion

You should now have enough information to start your Preliminary Budget and have a good understanding of when you will be able to get more of the details to refine your budget. Because every situation is unique, as you start putting together your numbers, we recommend that you get in contact with a software selection consultant, a software research firm, a few software vendors, or implementation companies to validate your estimates. If you would like a free template cost estimation spreadsheet that you can use to help put together your budget, please email us at budget@softresources.com.