Posted on July 22, 2019

Factors affecting Total Cost of Ownership (TCO) when moving to Cloud

A recent report stated that the average ERP software budget per user is USD 9000. While 13% of the organizations globally upgraded ERP systems in 2019-20, 87% required ERP implementation assistance. While determining whether to transition the existing ERP solution to the Cloud or stay on-premises, businesses must understand the economic impacts of the current ERP solution and how the ERP might look on the Cloud.

When organizations move from on-premise to cloud, there is a significant impact on the total cost of ownership. There are several different cloud forms, such as private, public, and hybrid, and each model has its own merits and cost. According to a report from Accenture, migrating areas of the business to the public Cloud can cut the Total Cost of Ownership (TCO) up to 40%. Total Cost of Ownership (TCO) is essentially a financial estimate that determines the economic value of an investment against the total direct and indirect costs over a system’s lifecycle. The graphic showcases a comparative cost analysis between the Cloud and on-premises.

Cloud and On-Premises Solutions

While visualizing a transition to Cloud, five cost areas, including software, hardware, implementation and training, IT personnel, and maintenance, affect TCO estimate.

Software

Software

ERP system is fully interoperable with existing systems. Several Cloud-based applications must be procured. The software application cost includes supporting products and services, such as add-on applications, ISV solutions, customizations, and other integrations. While looking at the Total Cost of Ownership estimate, businesses must include costs associated with implementation, operations, replacement, and upgrades at the end of the system lifecycle.

Implementation

Implementation, customizations and training

Microsoft Azure DashboardMint Jutras reported that only 37% of users required significant ERP customization. TCO of implementation includes the cost of setting, configuration, software testing. The cost also includes secondary requirements such as backups, disaster recovery, among others. While most companies resort to out-of-the-box implementation, few require customization and corresponding training, which affects the TCO of the ERP implementation.

Hardware

Hardware

According to a report from Hubspot, the TCO of owning an ERP is 3-5% of the annual revenue. Since all the data and application is hosted virtually, the need for large-scale infrastructure is minimized. Expenses allocated for servers, spare parts, supplies can be redirected to migration costs and monthly cloud hosting costs. Cloud allows businesses to flexibly manage hardware costs without owning, maintaining, or paying for servers.

IT personnel

IT personnel

One of the important single-line cost items is often the IT personnel budget. Personnel and associated IT costs have been affecting resource allocation for companies using traditional ERP systems. Notably, 40% of businesses in a cloud-based ERP environment improved ROI due to reduced IT cost. As a result, the TCO of Cloud is significantly reduced when compared to on-premise ERP. This surplus inflow of revenue can now be redeployed, and organizations can have better use of personnel.

Maintenance

Maintenance

Cloud ERP offers updates, fixes, and patches released on a continuous upgrade cycle, thus reducing maintenance costs and allowing for immediate deployment. Cloud is offered as a SaaS that offers a pay-as-you-go payment model either monthly or annually to host all the software applications. While infrastructure needed to maintain the ERP is reduced, intangible benefits of the Cloud, such as innovation and elasticity, reduce the total cost of ownership in the long run.

To get a more detailed cost analysis between cloud and on-premise watch the below video.

Contact Korcomptenz today to perform a comparative TCO analysis. Get the knowledge needed to make a fully informed financial decision about the direction of the organization.

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