Enterprise System Spectator blog: ERP and enterprise system vendor evaluation, selection, and implementation.

The Enterprise System Spectator

Wednesday, August 29, 2007

Total cost study for an open source ERP project

Baseline Magazine has an interesting case study on PerTronix Performance Products, of a small manufacturing firm that implemented the open source ERP system, Compiere. What's interesting is that the article reports the specific costs that the company incurred for the open source implementation. Thus, it provides a useful comparison with the typical costs for proprietary ERP systems.

Here are the metrics reported for PerTronix's open source ERP implementation:
  1. Number of employees: 100
  2. Number of named users: 20
  3. Upfront costs (licenses, customization, training, and implementation): $20,000
    or, $1,000 per user
  4. Hardware and operating system (Dell and Microsoft): $3,800
  5. On-going support from Compiere partner: $12,000/year
    or, $600 per user
  6. On-going support as percentage of upfront costs ($12,000 / $20,000): 60%
Now let's look at these metrics in light of a typical implementation of a proprietary ERP system:
  • The up-front costs really stand out as exceptionally low: $1,000 per user is about one-fourth of the typical cost of a proprietary ERP implementation. For planning purposes, I generally assume about $2,000 per user for software, plus at least one times that for implementation, or $4,000 per user--usually more. Of course, the fact that there is little if any software license cost is a major driver of the low cost advantage of open source, here. (The article does mention "license costs," indicating there may have been some proprietary extensions of Compiere as part of the deal here--the article doesn't say. But whatever they are, they couldn't account for much of the upfront costs.)

  • The $600 per user for on-going support is only somewhat higher than that for proprietary ERP, which generally runs about 20% of the initial license fee. Assuming an initial license fee of $2,000 per user, a proprietary ERP system would generally cost about $400 per year in maintenance fees, which cover software patches and help desk support. The $600 per user figure is certainly not out of line.

  • Because Compiere is running on low-cost hardware and a Windows operating system, these costs are quite low, although many proprietary ERP systems, especially packages written for small and mid-size firms, run on this platform. So, we cannot point to an advantage for open source here.
So the major difference in cost between open source ERP and proprietary ERP lies primarily in the up-front cost. The on-going support costs are similar, which is not surprising, since those costs are largely driven by the cost of labor.

One might also point out the advantages of open source in terms of flexibility. If the lead development organization, Compiere Inc., goes out of business, PerTronix still has rights to the source code. If the Compiere implementation partner raises its support fees, PerTronix can go look for another, or it can hire its own support technicians. There is no vendor lock-in.

The article also discusses the benefits of the new system, which include centralizing of order processing and inventory management across multiple facilities, productivity improvements, ability to implement price revisions more frequently. But we can assume that those benefits would have been realized from a proprietary software implementation as well. Therefore, the real difference between an open source ERP system and proprietary software stand out more on the side of cost and flexibility.

Is open source ERP the right solution for all companies? Definitely not. These products, such as Compiere, Open For Business (OFBiz), ERP5, Tiny ERP, are still small in scale. Although they may have strong functionality in a few areas, they lack the overall breadth of features of established proprietary offerings. This is why there is almost always customization involved in the implementation.

But open source operating systems (e.g. Linux) and application platforms (e.g. Apache, JBoss), were once minor players as well, and today they have significant market share. In the case of Apache, it is the market leader. Open source is moving up the technology stack to business applications. Whether it can gain significant market share remains to be seen. ERP systems are much more specialized than operating systems and application platforms. It is not clear to me whether there are sufficient populations of developers to gain critical mass for these products, as there has been for products lower in the stack.

Who should consider open source ERP today? In my opinion, these solutions today are not so much an alternative to proprietary software as they are to custom development. An organization that knows it will need to do significant customization or enhancements to an ERP system should consider open source as a starting point instead of proprietary ERP. Organizations with unique requirements or unusual business models may be in this category. Modifying core code of a proprietary ERP system generally voids the warranty and makes on-going support less relevant, since the vendor will not support your custom modifications. Why not start, then, with open source ERP, where there is little if any charge for the source code? To me, that's a better choice than to start with 100% custom development.

I'm looking for more cost metrics on open source ERP implementations. If you're willing to share them with me, let me know.

Related posts
Compiere's open source ERP business model and growth plans
Open source ERP gaining adherents
Why organizations choose open source software
Build/buy pendulum swinging back toward build
Key advantage of open source is NOT cost savings
Open source: turning software sales and marketing upside down
Open source ERP
Buzzword alert: "open source"

by Frank Scavo, 8/29/2007 10:41:00 AM | permalink | e-mail this!

Read/post comments!

Friday, August 10, 2007

IT project management lessons learned, and re-learned

Liam Durbin, CIO at GE Fanuc Automation, writes in CIO Magazine about one of the most important lessons learned in IT project management--the need for strong leadership from the business side.
I took my current position on the heels of such a hard lesson. Our software business was the scene of the crime for our disastrous CRM implementation. Inside sales team was bleeding badly from several deep wounds and a thousand paper cuts. Channel partners were revolting. Activities that used to take minutes, like placing an order or checking availability, now could take half an hour. The system was bouncing frequently. The IT team was releasing a Siebel recompile every other day.
The root cause of the problems? A lack of strong functional leadership on the project. To emphasize this lesson, Durbin points out five scenarios where IT projects fail from lack of functional business leadership (in my words):
  1. Trying to make the new system work just like the old system
  2. Rushing the implementation to satisfy unrealistic schedule expectations
  3. Expecting the IT project manager to represent business users as well as IT
  4. Underestimating the complexity of data warehouse projects
  5. Having multiple functional leaders instead of a single commander
It's not that IT executives don't realize the need for engagement by functional leaders--it's that they too often forgot or compromise "just this one time." They know what's right, but they don't stay strong in the face of false assumptions or unrealistic expectations.

Read the whole article.

Related posts
Philly pulls plug on failed Oracle project
Project management: the missing discipline

by Frank Scavo, 8/10/2007 10:23:00 AM | permalink | e-mail this!

Read/post comments!

Powered by Blogger

(c) 2002-2018, Frank Scavo.

Independent analysis of issues and trends in enterprise applications software and the strengths, weaknesses, advantages, and disadvantages of the vendors that provide them.

About the Enterprise System Spectator.

Frank Scavo Send tips, rumors, gossip, and feedback to Frank Scavo, at .

I'm interested in hearing about best practices, lessons learned, horror stories, and case studies of success or failure.

Selecting a new enterprise system can be a difficult decision. My consulting firm, Strativa, offers assistance that is independent and unbiased. For information on how we can help your organization make and carry out these decisions, write to me.

My IT research firm, Computer Economics provides metrics for IT management, such as IT spending and staffing benchmarks, technology adoption and investment trends, IT management best practices, IT salaries, outsourcing statistics, and more.

Go to latest postings

Search the Spectator!
Join over 1,700 subscribers on the Spectator email list!
Max. 1-2 times/month.
Easy one-click to unsubscribe anytime.

Follow me on Twitter
My RSS feed RSS News Feed

Computer Economics
Outsourcing Statistics
IT Spending and Staffing Benchmarks
IT Staffing Ratios
IT Management Best Practices
Worldwide Technology Trends
IT Salary Report


2014 Best Independent ERP Blog - Winner 2013 Best ERP Writer - Winner Constant Contact 2010 All Star Technobabble Top 100 Analyst Blogs

Key References
Strativa: Business strategy consulting, strategic planning
Strativa: IT strategy consulting
Strativa: Business process improvement, process mapping, consultants
Strativa: IT due diligence
Strativa: ERP software selection consulting and vendor evaluation
Strativa: CRM software selection consulting and vendor evaluation
Strativa: Project management consulting, change management
StreetWolf: Digital creative studio specializing in web, mobile and social applications
Enterprise IT News: diginomica

Spectator Archives
May 2002
June 2002
July 2002
August 2002
September 2002
October 2002
November 2002
December 2002
January 2003
February 2003
March 2003
April 2003
May 2003
June 2003
July 2003
August 2003
September 2003
October 2003
November 2003
December 2003
January 2004
February 2004
March 2004
April 2004
May 2004
June 2004
July 2004
August 2004
September 2004
October 2004
November 2004
December 2004
January 2005
February 2005
March 2005
April 2005
May 2005
June 2005
July 2005
August 2005
September 2005
October 2005
November 2005
December 2005
January 2006
February 2006
March 2006
April 2006
May 2006
June 2006
July 2006
August 2006
September 2006
October 2006
November 2006
December 2006
January 2007
February 2007
March 2007
April 2007
May 2007
June 2007
July 2007
August 2007
September 2007
October 2007
November 2007
December 2007
January 2008
February 2008
March 2008
April 2008
May 2008
June 2008
July 2008
August 2008
September 2008
October 2008
November 2008
December 2008
January 2009
February 2009
March 2009
April 2009
May 2009
June 2009
July 2009
August 2009
September 2009
October 2009
November 2009
December 2009
January 2010
February 2010
March 2010
April 2010
June 2010
July 2010
August 2010
September 2010
October 2010
November 2010
December 2010
January 2011
February 2011
March 2011
April 2011
May 2011
July 2011
August 2011
September 2011
October 2011
November 2011
December 2011
January 2012
February 2012
March 2012
April 2012
May 2012
June 2012
July 2012
September 2012
October 2012
December 2012
January 2013
February 2013
March 2013
May 2013
June 2013
July 2013
September 2013
October 2013
December 2013
January 2014
February 2014
March 2014
April 2014
May 2014
June 2014
July 2014
August 2014
September 2014
October 2014
November 2014
December 2014
February 2015
March 2015
April 2015
May 2015
June 2015
July 2015
September 2015
October 2015
November 2015
February 2016
May 2016
June 2016
July 2016
August 2016
September 2016
October 2016
January 2017
February 2017
May 2017
June 2017
October 2017
January 2018
April 2018
May 2018
Latest postings