When it comes to buying enterprise software, the determining factor for decision making, should be value, not price. However, most procurement teams, still focus most of their attention in negotiating the best price instead of also providing due weightage to the value that a certain ERP system under evaluation happens to provide. Evaluating something to be procured, largely based on price could be a possible approach for commodity goods or consumer items, but this approach fails to work when buying ERP systems. A far more effective approach is to focus on the value provided by the software rather than only on its price.
You may be able to bargain a great price for an ERP software but the pain of having to replace that system in due course, could be terrible, compared to the temporary satisfaction you might gain from procuring a very affordable ERP system.
The origin of software value
Value is normally always something that the buyer perceives, in a product or service that he wants to buy. What the buyer is prepared to pay, forms the basis of the price for most goods and services. However, when it comes to ERP systems, the value does not flow from deliverables such as meeting project milestones, user trainings related to the application or so on. Rather value item from the output that flow, from implementation and use of that software, i.e. from the capability of the software to meet the organization’s specific business needs.
By their very nature, ERP systems happen to be quite complex. For example, if a mid to large sized enterprises is considering an ERP system, a deep dive analysis can result in a set of business process requirements which translate into may be thousands of forms and reports. The value of the software can be estimated from the extent of the functionality that the ERP system is seen to adequately meet based on the business requirements. None other than the buyer can decide how much these functionalities means for the business and therefore how much the business will pay for it.
Determining software value
The basis for determining the value of an ERP system is identifying the requirements that must be satisfied, including both functional and technical requirements. It could be a terrible mistake to select an ERP system without conducting a detailed requirements analysis. Once all key requirements have been identified, a rating could be done by the organization, to assess gaps between the functionality matrix in the ERP and what is available in the ERP. It is extremely tough to find an ERP which is a perfect fit. Often, there could be a certain level of tolerance required to practically match the ERP with the identified requirement set and arrive at a consensus to go ahead with a buying decision. Once the value of the ERP can be estimated, you can then decide if the price of a particular ERP is justified or not.
Why the value approach works
Requirements that are not identified at the analysis phase, could be found during implementation phase . Sometimes if the standard product does not meet the requirements, then it’s the responsibility of the implementation team to decide how to meet them by way of configuration possibilities available in the system. If the requirements cannot be enabled using configuration possibilities, the implementation team has to design and develop another option .This option could be add-on solutions , customization through coding , business processes modification , etc. We need to understand that all this kind of extra effort result in both cost and time overruns during an ERP implementation. Once there is a slippage in terms timelines and delays in project milestones start creeping in , we can be sure there is serious trouble to be tackled.
The value of an ERP system originates from its ability to satisfy business needs and requirements through a set of functionalities. If a detailed requirements analysis is done at the outset and no additional new requirements are discovered during the implementation, the project manages to stay within budgets allocated and the time estimates given. End users are then satisfied as the system works as expected and there is no business interruption, while transitioning to the new system. Forecasted savings and benefits are realized, and the ERP system manages to deliver the expected value.
If price is the only factor based on which the ERP system is purchased, it is generally seen that gaps were left and a detailed requirements analysis is often missing. Risk mitigation in ERP selection and implementation. Is an important factor and the risk needs to be always minimized. ERP selection based on value and not price is often seen to better meet the business requirements. In the final analysis, value and not price should form the basis for the selection of an ERP system.
Hashtag offers a range of ERP evaluation, selection and implementation services and helps the client, ensure that the foundation of the selection process must be value and not just the price.
For further details, please contact Hashtag Consulting at email@example.com