When considering how to pay for an ERP system, there are several possible options. The option you choose will depend on the following factors:
• Is the software considered a capital expense or an operating expense?
• Is the software intended for long-term or short-term use?
• Will the system be deployed on premise or as a service?
Based on your consideration of these factors, you can choose the most advantageous payment option for your organization.
Perpetual Software Licensing
If you are able to make your purchase as a capital expense, a software license is the most common option. Usually the license will be perpetual, which means that after you pay a one-time license fee, you will have the right to use the software indefinitely. There are usually restrictions in perpetual licenses. For example, your use of the software can be limited to a particular number of named users or servers.
Another common restriction is the requirement of purchased maintenance. Along with a perpetual license, you would have to agree to purchase maintenance for a fee. Purchasing the maintenance would also give you access to updates and improvements in the software.
Term Software Licensing
In some cases you may need to purchase software for a limited time. If you plan on expanding in the future or have limited resources to commit to software purchases, a term license may be appropriate. A term license will give you access to the software only for a period of time. After expiration of the license term, the software would have limited operation or be blocked altogether.
For situations where software purchases need to be classified as operating expenses, a subscription makes more sense. You can book your software subscription costs as an operating expense even in cases where you run the software on your own hardware.
To take full advantage of software subscription pricing, consider software as a service (SaaS) or hosted software subscriptions. In the case of SaaS or hosted solutions, the entire expense of the ERP system can be considered an operating expense.
Keep in mind that how you deploy ERP in your business and how you pay for it are separate considerations. One decision should not necessarily drive the other. Instead, look for the best fit in terms of features and benefits first. Then consider the payment method that meets your financial requirements. Knowing the options available should help you negotiate a plan that is best suited to your needs.