What is TCO (Total Cost of Ownership)?
The complete cost of an ERP system including software licensing, implementation, customization, training, and ongoing maintenance.
Definition
Total Cost of Ownership (TCO) is a financial estimate of the full cost of an ERP system over its useful life (typically 7-10 years). TCO includes software licensing or subscription fees, implementation services (consulting, configuration, data migration), customization and development, hardware/infrastructure (for on-premise), training and change management, ongoing maintenance and support, and upgrades. TCO is critical for accurate ERP budgeting because the software license is typically only 20-30% of the total cost.
How TCO Works in ERP
When evaluating ERP systems, TCO should be calculated for each vendor over a 5-10 year period. Cloud ERP typically has lower upfront costs but higher annual subscription fees, while on-premise ERP has higher upfront costs but lower ongoing costs. TCO analysis should include hidden costs like data migration, integrations, process redesign, and productivity loss during transition.
Frequently Asked Questions
What is included in ERP TCO?
ERP TCO includes software licensing/subscriptions, implementation services, customization, data migration, training, hardware (on-premise), annual maintenance/support, and upgrade costs. Implementation services typically cost 2-3x the software cost.
How do I calculate ERP TCO?
Add up all costs over 7-10 years: Year 1 (software + implementation + training) plus Years 2-10 (annual subscription/maintenance + support + incremental customization + upgrades). Include indirect costs like productivity loss during go-live.