ERP TCO: Your guide to assessing total cost of ownership

ERP systems offer many advantages, from automating workflows to streamlining processes and presenting real-time business insights.

However, those powerful benefits come at a price.

As with any significant business expense, you’ll need to be able to justify the return on investment in an ERP. To do that, you must first assess the Total Cost of Ownership (TCO).

Understanding total cost of ownership is essential because it gives you a complete picture of the costs involved in implementing and using a tool or system. When it comes to ERP, there’s more to consider than you might think.

It’s not just about the upfront costs; it’s about the long-term expenses and savings that come with your new system. This guide will walk you through the key components of TCO, helping you make an informed decision that aligns with your business’s needs and goals.

Ownership of traditional vs modern cloud ERP

Firstly, you need to understand the difference between cloud and on-premise ERP.

When it comes to cloud ERP systems, the term “TCO” is a bit of a misnomer because the concept of “ownership” of a cloud-based product isn’t the same as with on-premise or hosted systems.

• Traditional ERP ownership: In traditional on-premise ERP systems, ownership involves tangible assets. Companies purchase the software outright, load it onto their hardware, and maintain it on-site. Hosted solutions offer a similar model, where you own the software but not the hardware it runs on.
• Modern cloud ERP ownership: With cloud ERP, you don’t “own” the software in the traditional sense. The ERP vendor manages and controls the software and hardware, hosting everything online. Cloud ERP systems, like MYOB Acumatica, are hosted in the cloud and licensed on a subscription basis, either monthly or annually.

This cloud-based approach offers several advantages:

• Lower TCO: Cloud ERP reduces the need for costly infrastructure and system administration.
• Simplified maintenance and support: Subscriptions typically include maintenance, updates, and support, easing the burden on your IT team.
• Easier deployment: Cloud systems can be deployed more quickly and with less disruption compared to traditional on-premise solutions.

Why TCO matters

When evaluating ERPs, it can be tempting to focus on upfront costs. But that’s only part of the story.

The real cost of an ERP system includes everything from implementation and training to ongoing maintenance and support.

If you don’t consider all these factors, you might underestimate the true cost of the system — or worse, be unprepared for unexpected expenses down the line.

By understanding TCO, you’ll be better equipped to:

• Compare options accurately: TCO allows you to compare different systems on a level playing field, ensuring you’re not swayed by low upfront costs that could lead to higher long-term expenses.
• Build a strong business case: Understanding TCO is critical to calculating ROI and convincing stakeholders that a new ERP is worth the investment.
• Plan for the future: Knowing your TCO helps you budget for both the initial rollout and the ongoing costs, leading to fewer surprises and more control over your finances.

Breaking down the components of TCO

1. Upfront costs

These are the most visible costs:

• Software licensing or subscription fees: When you purchase an on-premise ERP,  you pay a perpetual licence to run the software on your own internal servers. For cloud-based ERPs, this is typically a subscription fee paid monthly or annually.
• Implementation and setup: This includes configuring the system, migrating data, and integrating the ERP with other software.
• Hardware costs: On-premise ERPs require your business to run the system through its own internal servers, in each business location. While cloud-based ERPs reduce the need for on-premise hardware, you might still need to upgrade your network infrastructure.

2. Ongoing costs

Once your ERP is up and running, ongoing costs include:

• Subscription fees: Recurring fees must be factored into your long-term budget.
• Maintenance and support: Some level of support is usually included, but premium support might cost extra. On-premise ERP systems may also require upgrades to new servers or additional devices for staff to take advantage of new functionality.
• Training: Initial and ongoing training for your team as the system evolves.
• People:On-premise ERP systems often require considerable people resources to maintain and support the infrastructure that hosts the system, as well as to implement upgrades. Cloud-based ERP vendors handle these responsibilities as part of their subscription fee.

3. Indirect costs

These are less obvious but impactful:

• Downtime during transition: Switching to a new ERP can cause disruptions and lost productivity. This is why it’s critical to work with an ERP vendor that understands the importance of a smooth implementation.
• Process changes: Implementing a new ERP often requires changes to business processes, which can be time-consuming.
• Employee morale and turnover: Poorly managed change can lead to dissatisfaction or turnover, adding recruiting and training costs.

4. Long-term savings

Potential savings from a cloud-based ERP include:

• Reduced IT costs: The IT burden is shifted to the provider, reducing your need for in-house support.
• Scalability: Cloud-based ERPs scale with your business, eliminating the need for new systems as you grow.
• Reduce your tech stack: MYOB Acumatica has a wide variety of product capabilities that cover all of your business processes.

Before making the move to MYOB Acumatica, Melbourne-based business Lights and Tracks was using four different platforms.

Thanks to MYOB Acumatica, they’ve been able to streamline their tech stack – which has had huge financial and time efficiency benefits.

“Our tech stack of platforms has dropped from four down to one, and our yearly expenditure on platforms decreased by about $40,000,” says Michael Jones, General Manager, Lights and Tracks.

Making the switch: Is it worth it?

Is switching to a cloud-based ERP worth the investment? The answer depends on your business needs:

• Current pain points: If your current system causes inefficiencies, the benefits of a cloud-based ERP may outweigh the costs.
• Growth plans: A cloud-based ERP provides the flexibility and scalability needed for growth without significant hardware investment.
• Long-term vision: Consider if your current system will support your future growth or hold you back.

Traditional ERP systems stifle growth with restrictive pricing models and rigid constraints.

MYOB Acumatica provides industry-specific editions, aligned for optimal functionality and performance with scalable pricing based on unique company requirements.

TCO as a decision-making tool

Assessing the TCO of a cloud-based ERP is about making a strategic decision that aligns with your long-term goals.

By understanding TCO, you can make an informed decision that considers the full range of costs and benefits associated with a new system.

Remember, the goal isn’t just to save money — it’s to invest in a solution that supports your business as it grows. The return on that investment includes saved time, fewer errors, greater opportunities for business growth, and much more.

With a clear understanding of total cost of ownership, you’ll be in a strong position to make the case for a cloud-based ERP and secure the support you need from your stakeholders.

MYOB Acumatica is an ERP system for your entire business, with industry-specific editions, and aligned for optimal functionality and performance with scalable pricing based on unique company requirements.

This means you only pay for what you need — scale up as you grow.

Talk to one of our ERP experts today to discover how MYOB ERP can accelerate the growth of your business.

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Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.