The first step in the software selection process is to plan your project and put together a budget. Here are some tips to help you get started!
For a more detailed discussion of budgeting, we suggest you read an article we wrote a couple of years ago titled How to Budget for Enterprise Software. You should also check out our Software Market Overview that will give you a range of costs for the software market. Or, if you would like some quick advice, call us at (425) 216-4030 so that we can give you some ballpark budgeting ideas for the software you are considering.
Software Project Planning Tips
Software Project Planning Tip #1 – Project Team
Make sure that you set up your project team with a strong project manager and representatives from each of the functional areas of your business. These people should be key members of their respective groups. Make sure that you have buy-in from the organization starting with executive management down to the end users.
Software Project Planning Tip #2 – Timeline
Plan the steps and the timeline for both the software selection process as well as the estimated implementation. At this stage of the project, you will not know exactly what the implementation timeline will be as it will depend greatly on the software you select, but you can at least put together a high-level estimate at this point.
Creating a Budget for Software & Implementation
Budgeting for enterprise software is probably one of the most difficult budgets to create because you do not know at the beginning of the project exactly what the final cost will be. There are 3 main components of out-of-pocket software cost – Software License (or Service Level Agreement for Cloud solutions), Software Maintenance, and Implementation Services.
Software Budgeting Component #1 – Software License Cost (or Service Level Agreement for Cloud solutions)
This is the initial cost to buy the software. Although there are as many ways to price software as there are vendors, the software license is typically calculated by estimating the number of users that will be using the system and multiplying that by a per-user license cost. The vendors may also charge a fee for the various modules or areas of functionality that you purchase.
Similarly, Cloud solutions’ Service Level Agreement are priced by the number of users, but instead of a single up-front license cost, Cloud vendors will quote you an annual license fee (basically a lease) based on the modules you will be using and the number of users. As a general rule of thumb, we find that Cloud vendors pricing is about 1/3 of the up-front license cost of on-premises solutions. The difference is that Cloud vendors charge that fee on an annual basis, rather than a single up-front license cost.
Software Budgeting Component #2 – Software Maintenance Cost
This is the annual fee that you pay the software vendor for updates, upgrades, and some level of support. Currently this is typically 18-25% of the “then current list price” of the software, not the discounted price that you pay for the initial software license.
Cloud solutions do not have a maintenance fee, instead maintenance is included in the annual fee you will pay to use the software.
Software Budgeting Component #3 – Implementation Services
This is the cost to implement the software and will be necessary whether you select an on-premises or cloud solution. When you talk with the vendors at the initial stage of budgeting, they will typically talk about their implementation ratio. This is the ratio of implementation service cost to the software license. So for every dollar you spend on the software license (or annual license fee) you can expect to spend X dollars to implement. In the mid-market this implementation ratio is typically in the 1 to 1 range. But more complicated implementations can be in the 2 to 1 or 3 to 1 range (implementation cost to software license cost). The most complex projects can even get up to 10 to1.
Keep in mind that before you sign the contract there will be a lot of discounting to get you to sign the contract. Software license cost is very negotiable, so make sure you review our software contract negotiation tips page.
More Thoughts on Cloud Solutions (Software as a Service (SaaS))
In recent years the Cloud model has risen in popularity. The benefit of this model is that up-front costs are lower and you do not need to install the system on your server, or manage updates which reduces your internal hardware and IT cost. The disadvantage is that in many cases the out-of-pocket cost over the long run can be higher than implementing software on-premises. The main thing to remember is that implementation in the Cloud simply means that you are outsourcing the management of the system to a vendor and there are costs associated with that. Whether a Cloud or on-premises solution is right for your organization, depends on your situation.