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Chapter 8
Advantages of purchasing software Advantages of using SaaS to run ERP
and computers for ERP

Source Line: Course Technology/Cengage Learning.

FIGURE 8-7 Arguments for purchasing ERP system and software versus using SaaS

234 After reviewing your memo, the CIO has asked you to provide some financial data to
help him make a decision. He would like you to prepare a spreadsheet that analyzes the
financial impact of both scenarios. You need to compare the monthly cost of using the
SaaS provider with the total cost of purchasing an ERP system that would run on Fitter’s
servers. Weigh the pros and cons of each method, and then make a recommendation,
which the CIO will present to the chief financial officer of Fitter. As you work through
these calculations, keep in mind that Fitter’s net income is $3.4 million (you can find
more details in Chapter 5). The following sections provide you the financial details you
should take into consideration.

Option 1: Buying Computers and Software Rights for an ERP System
To set up its own ERP system, Fitter must buy the following:
• Database server—The server would cost $70,000.
• Application server—Fitter needs a server to run the ERP application, which
would cost about $40,000.
• PCs—Some of Fitter’s existing PCs could be loaded with the ERP software’s
GUI and be used to access the system. Because more Fitter employees will be
connected to the new system, however, Fitter will need 10 additional
computers. Total cost for the PCs would be $15,000.
• Computer maintenance—Fitter needs to make sure all its PCs and servers
run properly. To do this, Fitter would purchase a maintenance contract to
cover all hardware. This contract would cost about $1,000 a month, or
$12,000 yearly, and is in addition to any costs Fitter currently incurs to
maintain its existing hardware.
• Licensing rights—Licensing rights to the ERP software for all users for five
years would cost $500,000. The CIO does not know whether further outlays
will be required after the fifth year, and therefore is limiting the analysis to
the years 2013 through 2017.
• Installation—The ERP vendor will help install the system, but Fitter also
needs to hire consultants for the six-month implementation. At $3,000 per
day, the cost is estimated at $486,000.
• User training—Included with the purchase of the rights to the ERP software
is training at a local training center for key personnel involved in the ERP
implementation project. Fitter wants further training, however, for Fitter-
specific business practices. The additional training will cost $2,000 per day

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