Do I Need a Cloud ERP / CRM: What You Need to Know
Working with a Budget
If you are a manager, like it or not, you have to work with the budget you are given. Once a year, we all submit to the painful budgeting process where you align the dollars to your business strategy. This is your time to make a point and provide justifications around the need for yet another tool. Depending on where you are in the growth of your business, there will be different opinions around changing your current system. One of them will be from the person that has been in place for the longest time—that person’s opinion will be that your current systems are doing just fine and nothing should be changed.
What Your CEO & CFO Will Want to Know
The first thing your CFO will likely want to know is how much this will cost. Sales and production will be on board right away if they are the one with the most pain points. The CEO will be interested in the business information this new system will provide and how it will contribute to the growth of the company.
But in the end, it comes down to the numbers.
Building Your Business Case
As you are building your business case, always starts with “why?”. Why do you think you need to change your systems? Where are you today and what are your growth plans? The good answers are always related to reasons around enabling the business to grow, or keeping it growing. Typical situations are:
- antiquated systems that require too much effort to modify and accommodate your future expansion
- lack of any consolidated systems that keep you from having the proper data to manage the business
The reality is that you will not be able to buy an expensive system if your sales and margins do not support it. You might have some external funding or another type of initiative that supports such a move, but do not try to buy a high end system you cannot afford. That still leaves you with plenty of options.
When we talk to companies who want to put in place NetSuite, we validate the company size and sales and draw a comparison with their industry average before starting the process. As an example, companies that have sales of less than $10 million will unlikely be able to successfully put in place a complex ERP system. The failure reasons will range from either lack of focus or resources to simply not being able to afford the software and professional services cost to put the new system in place and maintain it.
The rule of thumb is that around 5% of total sales should be put toward running the systems of a SME your new ERP / CRM is just one part of that.
(Please note that IT spending as a percentage of revenue varies significantly by industry sector. see http://www.zdnet.com/article/it-budgets-2016-surveys-software-and-services/ for more specific details)
Tools You’ll Need
You can use ROI and TCO tools to build your model and justify the project.
The ROI (for Return on Investment) calculation is often used to support business cases.This is a simple calculation, in my opinion best used in an industrial context where you are putting in place new machinery. How long will it take to amortize the cost of my machinery? How long or how much will I save in labour and added productivity? In the manufacturing world, these are things that are easy to count or to measure.
When you put an ERP or a CRM system in place, the return is much harder to measure. That’s why I prefer the concept of TCO (Total Cost of Ownership) to compare my current system to the new one. What is important is that you consider all aspects of the TCO of your current system before you compare it with the list provided from the vendors.
Where the ROI would try to measure the increased productivity that the new system will bring, the TCO will measure the financial impact. I find it much less subjective.
Components of a TCO for a new ERP/CRM System:
- Software license (On premise only)
- IT Infrastructure (HW & SW) (On premise only)
- Implementation Services (Cloud and On premise)
Annual Operating Expenses
- Annual HW & SW Maintenance(On premise only)
- Ongoing IT Operations (Cloud and On premise)
- Ongoing system specific Business Operations (Cloud and On premise)
- Major System Upgrades (On premise only)
- Minor System Upgrades (On premise only)
- Facilities (Power and Space)
- Monthly Subscription (Cloud only)
One area that is often missing is the salary of those managing your systems. Make sure you note down all the extra work employees need to do to feed your antiquated system.
Very often, when we compare a Cloud solution to a traditional system, we will find that the cost of the vendor managing the hardware and the software, (without adding any additional business value) will more than pay for the software and implementation cost of a new system.
If you are new to building a business case, you can buy this useful guide written by Harvard business school professors : https://hbr.org/product/hbr-guide-to-building-your-business-case-ebook-tools/10020E-KND-ENG
Contact us if you want us to run a TCO for your project! We have ready-made tools to give you a quick sample.