Cost Analysis

As it was mentioned in the system overview section of the Microsoft Dynamics ERP, the most appropriate product for IVK is Microsoft Dynamics GP, which is intended for growing mid-size companies like IVK.

There are many costs associated with Microsoft Dynamics GP product, and the software itself is only a fraction of the cost. In order to provide an estimate of the whole cost of using the system at IVK, we will need to analyze the software licenses costs, maintenance fees, implementation services fees, and the deployment costs.

The following graph below shows the proportion of each cost in the total cost, as well as the classification of those costs into variable and fixed costs:

According to an article published on CIO.com, Microsoft Dynamics pricing was on a per-module basis a few years ago (“Microsoft moves to Per-User Pricing for Dynamics”). Now the software pricing is concurrent user-based and depends on the cost per full or read-only (limited) users; for instance, if only 10 people need access to the system at the same time, only 10 licenses are needed. Microsoft certified partner, CAL Business Solutions recommends posting reports on the web portal to limit the number of full users. Based on IVK’s organization chart (Austin, 2009), users who will need full access could be the boards members, the CEO, and the heads of the departments (e.g. IT, Capital Markets, Legal, etc.), which amounts to about 15 full users. Since medium-sized companies like IVK usually have about 250 employees, although unlikely that all of them will need access to the system especially at the same time, but if 250 of them have limited access to the system there will be 265 users in total who will be using the system. Since IVK IT systems are not well-secured and there are currently many problems associated with their systems overall, IVK should invest enough in a new software in order to have safer and more effective operations. Therefore, it is best to buy the concurrent access for all the employees. The price is $3000 per full user, and $600 per limited user (CAL, Software List Price).

The other variable cost that IVK should consider before buying the GP product is the cost of deployment. There are 3 options to deploy Microsoft Dynamics GP: traditional on-premise, hosted, and subscription/on-demand. Since the first one is associated with a large initial investment in proper hardware, IVK will probably not be able to fund one more huge project in addition to other more important projects on data security and back-end system. The flexibility of the other two options helps mitigate the financial risks associated with making a large capital investment in IT, as Gallaugher mentions in Chapter 11 (Gallaugher, 2013). Although the Cloud deployment option requires the smallest upfront expenditure, this is also not suitable because, as CAL Business Solutions estimates, in the long run, IVK will pay more than it will if it deploys the system via a hosted server. Hosted server option will give IVK the flexibility to access the system from anywhere, extra data security, and reduced upfront IT costs. For this option, IVK will have to pay an approximately $2500 one-time start-up fee, and a maximum of monthly $180 per user fees.

The costs of implementation services include setting up the system, converting the existing data, training the staff, etc. This is usually completed by a Microsoft partner who also sells the software and it varies greatly depending on the special needs of the company (e.g. volume of data transferred, number of staff members required to be trained, etc.). However, according to a Microsoft certified partner, Cal Business Solutions, the average software cost to services ratio is from 1:1 to 1:1.5 (CAL, Implementation Costs).

The only fixed cost which is the one-year subscription to the Business Ready Advantage Plan is a required part of any Dynamics ERP software. It is also strongly recommended to continue the service since it offers maintenance, product updates and upgrades, 6-month cycle releases (“Microsoft unveils six-monthly updates to Microsoft Dynamics GP”),  protected list price,  customer resources, 24/7 self-service support, online learning, and future promotions. The maintenance subscription is a fixed fee independent of the number of users; it is 18% of the original software price and can lower after the first year if the company subscribes to a less supportive plan. More information about the benefits of different plans can be found here.

The following table displays the variable and fixed components of the total first-year cost to use the system.

Software license price	$195,000 (the total of full (15) and limited users (250) access price based)	One-time fee
Maintenance Plan fees	$35,000 (18% of $195,000)	Required for the first year
Implementation costs	$292,500 (based on the 1:1.5 ratio)	One-time fee
Deployment costs (via a hosted server)	$574,900 (based on the $2,500 start-up fee and 265 user-based costs)	Yearly fee
Total	$1,097,400	First year total

As it can be seen, the total upfront cost to start using the Microsoft Dynamics GP is $1,097,400 which is less than 6% of the current accrual basis IT budget. If they purchase the software rather than use the cloud deployment option, they will pay $195,000 in total for the licenses of all users. Although optional, subscription to the maintenance plan is also essential for IVK in order to quickly resolve future system problems which might turn away customers toward the competitor.  Implementation cost is a one-time cost which they will incur upfront. Finally, deployment cost of more than $500,000 which constitutes the largest part of the total cost of using Microsoft Dynamics GP needs to be incurred yearly to keep the system on a hosted server. 

References

Austin, R. (2009). The Adventures of an IT Leader. Boston, Massachusetts. Harvard Business Press.

Gallaugher, J. (2013). Information systems: a manager's guide to harnessing technology, version 2.0. Irvington, NY: Flat World Knowledge.

“Implementation Costs." CAL Business Solutions RSS. http://www.calszone.com/pricing-microsoft-dynamics-gp/implementation-costs/ (accessed May 27, 2014).

Microsoft Moves to Per-User Pricing for Dynamics. (2006, July 10). CIO. Retrieved May 28, 2014, from http://www.cio.com/article/22824/Microsoft_Moves_to_Per_User_Pricing_for_Dynamics

Microsoft unveils six-monthly updates to Microsoft Dynamics GP. (n.d.). - CIO.de. Retrieved May 28, 2014, from http://www.cio.de/news/cio_worldnews/2014/2947014/index.html

"Software List Price." CAL Business Solutions RSS. http://www.calszone.com/pricing-microsoft-dynamics-gp/software-list-price/ (accessed May 27, 2014).