Oilfield Software systems are all about efficiency and profitability.
One of the most strategic assets any business can have is their business system. The right business system automates processes, reduces rework and data porting, provides real time data for compiling accurate reports, and forecasts, and enables visibility into daily operations. It needs to be intuitive, and constantly improving ,and that requires integration.
This is concept of Enterprise Resource Planning, (ERP). The ability to perform and report on multiple functions, often simultaneously, all while accessing the same database. Regardless of the enterprise ERP Software must be considered a financial investment that will provide an initial cost recovery and ongoing return. Like all investment decisions if that investment does not sufficiently outweigh your costs, you should probably look for another way to invest your hard-earned income.
Return on Investment (ROI) is easily the most common method used in business to measure project returns and to compare these with other potential investments. It may seem like a simple metric on the surface however it is more complicated than it appears. A good business system can increase profitability in many ways. Typically the net gains are estimated by calculating the hourly time and effort reductions from streamlining business processes. But there is more! Often the value achieved by preparing better estimates, improving service levels, and quicker response times may be more difficult to put an accurate number on, and may offer the most value. The reality is that calculating ROI and analyzing the final figures is a complicated process with many misconceptions and challenges. Forecasting returns as accurately as possible will create a realistic ROI figure that you can use to measure success against your expectations. It is an important exercise, but lets start at the beginning with understanding whats included in the the initial and ongoing costs. What are all the real costs that may not be included in the vendors quote? Which costs should you consider. An accurate estimate depends on a thorough understanding of the costs involved in choosing and implementing a new ERP.
The initial cost of the software appears evident as it is in the quote. But what’s included?
Many software vendors package functionality in modules, so be sure all the additional modules you need are included. A module or option that finance is not familiar with may be the entire system to the quality or shipping department, so planning for an ERP purchase should include input from all department leaders. If you are planning a phased-in approach, document all the costs and the time at which each is expected to arise, no matter the time frame.
There are two primary deployment models for ERP, and their pricing structure is different.
License fees – On-premise vs SaaS
On-premise ERPs are hosted on your company servers and are usually purchased via a large, one-off license fee. The servers require maintenance, security, updates, and ongoing support services that can add up. ERP requires high level servers, which you should also factor into your ROI cost calculations.
Cloud software is hosted on third-party servers and accessed via the internet. They are typically priced on a per-user-per-month model for as long as you use the system. You won’t need to update your servers and you will eliminate the risk of downtime and disaster recovery. Typically Cloud Oilfield Software is more economical and mobile ready than on-premise software.
Vendor Implementation Fees
You will almost certainly need some help from your vendor or consultants during your implementation project. The better vendors conduct a complete business process analysis that considers the system architecture and the unique business requirements that your business model demands. Included will be a cost estimate and an efficiency return for each specific process, by department, conducting this analysis will provide a cost benefit for each area that improves efficiencies or capabilities with an estimated return. Often the Implementation resource will find numerous ways to automate process and reduce workloads while implementing the system. The cost for this service is determined by vendor resource hourly fees for the project and includes analysis, process mapping, data migration, training and support.
Fees will vary by company size and readiness.
With an on-premise system you will likely need to expand your system hardware capability and network systems to get the most out of your ERP systems. There will be minimum specifications to meet but you will need to plan for future growth and capacity. And depending on your current hardware allowing for future upgrades in 3 to 5 years are standard expectations as technology progresses.
Most ERP vendors charge for the number of users set up to use the system. In addition to those fees you need to consider user competence issues that new users may incur during an ERP project. Training takes time, and you may need to bring in temporary help to make up for this training time or offer overtime pay? Just because some users are on annual salaries and not hourly, there can still be a cost if you provide comp time. Whether the policy is formal or informal those individuals will want their compensation – whether that’s overtime pay or time off in lieu.
Another cost to consider is the time taken to become competent in the new ERP. On day one, users will not do their jobs as fast as they do today. Some users will be up to speed in a few days and others will take weeks. Task frequency and length should be factored into these costs. The monthly closing process in finance is one example. An annual marketing campaign is another. Your costs should allow some efficiency reductions during the first few runs of each ERP process.
This is by no means a comprehensive list of ERP ROI costs, but it gives you a sense of the context and detail required to accurately calculate or predict expenses. It is not as simple as looking at the price tag.
A poor return is an excellent way of eliminating potentially poor performing systems. Once you’ve identified which potential ERP systems are likely to offer a good return, you should examine them in further detail.
Configuration & Customization
Although similar these two descriptions define two different exercises.
Configuration is really personalisation that may include branding, industry terminology, some process mapping to reflect the culture and language of the business and are typically included with the price of the system. Most systems have a variety of areas that can be configured to within the ERP.
Customisations are code changes that require detailed planning and process rewrites and testing to add a capability to the ERP system that may be unique to the implementation.
Most vendors will provide a software development fee to add client specific customisations.
Even with the best planning there is always a danger of scope creep typically discovered during initial exploration or once using the system. Those few more capabilities or style changes that look easy from the outside may involve hundreds of code modifications under the covers that require a great deal of customisation. A contingency expenditure is always a critical inclusion to cover these extras and capabilities that may not have been identified in the initial requirements gathering process. Allow 20% of your implementation quote.
ERP vendors also usually offer a range of other implementation services, including project management, data migration, and system customization. Sometimes these are included in the overall system cost, but most vendors will charge them as an added extra. Be clear on which model your chosen vendor uses and your expectations on adding features.
Now that we understand the cost how do we calculate our return? You will be surprised because in fact if you choose the right ERP Software for your business is in fact free! Stay tuned for our next Blog on calculating ROI.
For more information on determining the potential ROI for Oilfield or Manufacturing software contact Neil MacLean at 403 608 1346, or email [email protected]