Estimating ERPNext Implementation Cost

Estimating ERP implementation cost can be tricky. However, there are multiple methods to arrive at an initial cost estimation before committing substantial resources to the project.

Implementation cost is one of the major components in the Total Cost of Ownership of ERPNext. ERP implementation is a complex project and cost accountants have come up with multiple methods to estimate costs for such complex projects.

You may receive widely varying estimations from different service providers. Each service providers may make a different set of assumptions about data migration, integration, training, etc while preparing the estimation.

Sources of Cost

The primary source of cost in implementation is people. Additionally, you may need to purchase some data processing tools. Cost is a function of time spent by resources on implementation project. So cost estimation exercise is time estimation exercise in reality.

Factors Influencing the Cost

1. Scope: Scope is the biggest factor influencing the cost. For example, implementing HR module with payroll would cost more compared to implementing HR module without payroll. If you would like to migrate historical data that would cost way more than just importing master data and opening balances.

2. Size: Size of the company is a major factor influencing the cost. For example, implementation in companies with a million items will need bigger budgets than companies with fewer items.

3. Variability: The more variability in your processes and products, the more use cases your implementation needs to cover. For example, a manufacturer with only 'Make-To-Stock' production mode has fewer use cases compared to a company with 'Make-To-Stock', 'Make-To-Order' and 'Engineer-To-Order' production modes.

4. Customization: Any critical functionality that a business needs which is not available out-of-the-box may have to be developed and this will increase the implementation cost significantly. A gap analysis before the implementation is necessary to estimate the customization cost.

5. Timeline: Implementations which start well ahead of the go-live date can optimize their engagement with external consultants for cost.

1. Top-down Approach

In the top-down approach the divide and conquer technique is applied. The overall task of implementing ERPNext is divided into sub-tasks like data migration, configuration, development, training, etc and cost is estimated for each sub-task. Estimating cost of sub-tasks is easier that estimating cost of the whole project. This is a quick but inaccurate method.

2. Three Point Estimation

In this approach instead of trying to come up with one number, the pessimistic, optimistic and most-likely scenarios are estimated. And then the average of the three is calculated. This approach will consider various possibilities and make provisions for them. Top-down and three point estimation method can be combined to calculate a range instead of a specific number.

3. Analogous Approach

In this approach, a historical similar project is referred for estimation. This requires a database of numerous projects so that a project "similar" in scope, time, domain, location is referred. Service providers who have implemented multiple projects in similar domain are in a better position to employ this approach. Also, a set os assumptions are made about the project as detailed data is not available yet.

4. Parametric Approach

In this approach, parameters which indicate the efforts needed are used for estimation. For example, implementation of ERP in a 100 employee company costed X so implementation in 200 employee company will cost around 2X. Here is the list of some of the parameters that can be used.

1. Revenue of the company
2. Number of employees
3. Number of users
4. Number of modules
5. Number of objects

The assumption made here is that the parameter picked indicates the effort needed for implementation. However, this may not be true. Each organisation is unique and processes in each company differ, hence parametric approach may not be as effective in cost estimation compared to projects where output is standardised.

You can use the above approaches to provide initial cost estimation when the details of the project are not known.

5. Engineering Build-up Approach

This is also known as bottom-up or detailed estimation. The overall project is broken into major components. And then each component is further broken down into tasks and each task into multiple sub-tasks. This results in what is known as the 'Work Breakdown Structure'. Then a cost is estimated for each task. It is a lot easier to estimate cost for a specific task as the scope of the task is fixed. Then the cost of all the tasks are added to arrive at the overall project cost.

Engineering build-up is inherently more accurate as it fixes the scope. However this approach requires all the necessary data and take time to estimate the cost.

Here is the list of some of the tasks to be completed to set up ERPNext.

While we can calculate the time it takes to complete an activity like 'Setup Wizard' easily, the amount of time needed for activities like setting up users depends on a number of factors. Is 2FA (Two Factor Authentication) required? Is access for certain users restricted to specific time of the day and from certain IP addresses?

6. Agile Implementation

The implementation cost is directly proportional to the implementation time. The implementation time is directly proportional to scope. If the scope is undocumented or lacks sufficient details, estimation of time and cost is challenging. Also, instead of porting the current processes, it may make more sense to re-engineer processes while moving to a new ERP.

In agile implementation, a small task like getting all the leads into the CRM module is the goal instead of implementing the whole CRM module. And this allows users to experience the systems and share feedback that can be acted upon quickly.

In ERP, everything connects to everything else. For example, to create an invoice, you need customers, items, tax templates, payment terms, etc. So these dependencies make agile implementation challenging. Despite of such challenges agile implementation is recommended over the waterfall implementation method in most cases.

Case Study

An electronics manufacturer in consumer electronics segment located in the Electronics Manufacturing Cluster in Titupati, Andhra Pradesh in south India implemented ERPNext in a period of four months. The initial estimation was three months. As the entity was being setup there were no historical transactions to be imported. In the first cut, no customizations or developments were made and the company was willing to use the standard features of ERPNext. In the process of implementing and using ERPNext in the first two months, a few gaps in the system were documented. Subsequently features were developed to fill these gaps in the third month. The CRM, Buying, Selling, Inventory, Manufacturing and Accounting module were implemented.

Conclusion

1. The engineering build up approach gives a fairly accurate estimation, but it needs substantial time and extensive data about the project. Additionally, if any of the assumptions made turn out to be wrong, the cost estimate changes substantially.
2. Instead of relying on one cost estimation technique, multiple methods can used to arrive at a range.
3. In most cases, especially for small and mid-size companies, agile implementation approach is most suitable.