Financing an ERP product does not equal financing a car

Microsoft offers zero percent financing on Dynamics ERP and CRM. Given the economy and the credit crunch, it must make a lot of sense, right? Not really. In ERP, licensing the product is far from being the most significant cost. Training, implementation, change management, additional hardware, additional software (like database), third party software components that goes with the new package (add ons are common addition to ERP implementations) make the money you spend with Microsoft the smallest part of your investment.

According to AMR research, only 20% -25% of ERP cost are actually invested in software licenses (this includes third party licenses like order management add on to the core product)

So, if you took Microsoft on their offer and purchased MS-Dynamics ERP for $200,000, you will pay only $5,000 per month for the software, but you are likely to spend $800,000 more during the course of the implementation- meaning that the cost you will pay before going live with your new product is likely to be 850K or so, which is equal to an 85% down-payment. You can try to finance the service fees as well, but you will have to pay high interest rates, and you are also unlikely to get everything covered (e.g. third party software)

It all gets back to my “reducing the risk” post.  On premise ERP happens to be high risk/strategic IT decision.  People are happy to make these decisions when things are going well, and a new ERP product is critical to support growth plans. Now when prospects are declining, companies will think twice about buying a new ERP product, with or without Microsoft’s generous offer. Customers are much more likely to make small, low risk investments on the edges of the enterprise. SaaS utilities, that are paid monthly by design, and usually requires much less professional services, are likely to be the winners of this shift in priorities.

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Financing an ERP product does not equal financing a car

4 thoughts on “Financing an ERP product does not equal financing a car

  1. Jason C says:

    I think your point is spot on about license being only a portion of the cost of ERP. However, please provide a little more context on the chart you are referencing from AMR research. From what report/paper does it originate? What business segment were they analyzing? etc.

  2. Thanks Jason. The chart is coming from “The Enterprise ERP Spending Report, 2007–2008”
    Thursday, November 08, 2007 by
    Simon Jacobson, Jim Shepherd, Bob Kraus. It is a “client only” report it is not available to the public. The focus was on large enterprises but experience shows that even with SMBs, the ratio is about the same.

  3. Gadi,

    great point. unfortunately or fortunately for Microsoft, a lot of their prospects and customers we talk to are still preferring on-premise ownership. In their case for that model that’s the best deal out there. However, a 10 year comparison of costs for 50, 100, 250, and 500 users that we have done in the past shows that it does come out cheaper in the long run with SaaS.

    In the meantime, with this economic climate, the 0% may turn out to be a differentiator among the on-premise vendors… but that’s comparing apples to oranges as you know!

    R “Ray” Wang
    Vice-President
    Forrester Research, Inc.

  4. Gadi – we use Intacct here for Financials & Distribution (core to ERP) along with Salesforce for CRM and ADP for HR. So we have built all business apps out with Saas. For ERP, Intacct is an option, and I am watching what Workday is doing with their “GL-free” Financials design, and will be curious to see what Salesforce dows with ERP on Force.com which is in development (on a slow train I presume). The only proven ERP products in this space that are Saas, about which I am aware are Intacct and Netsuite, and Intacct has most useful functionality completed. Good notes above….Doug

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