Total Cost of Ownership (TCO)

TCO is a very good way to evaluate the costs related to a new system. You need to include not just the software license costs, but also all the other direct and indirect costs. Sometimes vendors will give a low-ball cost for software, but will make up for it in later charges. You don't want any cost surprises part way through an implementation. What can you do?

Steps to Calculating TCO

Avoid ambiguity

You need to be very specific about your needs so that there is a minimum of ambiguity. If there is ambiguity, the vendors will be able to say that the needs were not communicated clearly enough, and that additional costs are required.

Avoid time and material quotes

The vendors would prefer to bill you on a time and material basis especially when there are unknowns. For example, they may tell you that they don't know how much training is required as they don't know the aptitude of the staff. This particular concern can be dealt with by taking a train the trainer approach, whereby the vendor only trains key people over a defined number of hours, and the key people train the rest of the staff. However the big unknowns are in conversion, customization and integration. The vendors have a legitimate inability to fix costs for these activities. Get the vendors to prepare specifications, which will enable them to provide a fixed price. The specifications should be prepared before the purchase of the software. The vendors are entitled to be paid for the time to prepare the specifications.

Boardroom pilot

Consider doing a board room pilot before you purchase the software. One objective of the board room pilot is to ensure that all costs are defined before purchasing the software. This would be a good time to have the specifications prepared for conversion, customization and integration.

Include all direct costs

The vendor could be involved in many implementation activities. Make sure you have quotes on all the costs. In the higher end systems, the implementation costs could easily be twice the costs of the software license.

Maintenance costs

Maintenance costs are usually charged on the list price and not a discounted price. You should also get a quote to maintain any customizations if there are upgrades to the core product. Same goes for third party products - you want to know the costs of upgrading the third party products.

Include all indirect costs

There will be internal costs. You may need to hire additional resources. Many key employees will be spending time on the project, and will not be able to complete their normal work activities.

Talk to references

Don't just ask about the software. You should also ask about the implementation costs.

Include future costs

By doing a net present value calculation, you may find that the solution with the higher license costs is less expensive after 5 years.

Put it in writing

Your contract should include details on what is included in the implementation.

License costs

Beware of license costs that go up with more users. You may find that the 1st 15 concurrent users cost much less than the next 15.

Avoid customization

Don't automatically think you need to customize something that you're currently doing, but does not exist in the software. There could be a workaround that will present itself after you have better understood the software. There could in fact be a better business process available with the new software. I have spoken to many companies that are stuck with old versions of software because of all the customizations that have been done. They are reluctant to upgrade to the most current release because the customizations need to be redone, which will be costly. There will be situations where customizations do make sense, but you should understand the total costs before proceeding.

Business process improvement

You have a big opportunity to improve business process when implementing a new system. Don't simply just re-implement your existing processes. You may be able to not only save costs during implementation, but also achieve significant benefits from an improved business process on an on-going basis.

Phased implementation

One effective way to deal with heavy up-front costs is to break out the implementation into phases. Do the essentials in phase one. Get the vendors to quote for each phase. In a year or so, you may find that some of the things you thought you required are not really necessary after all.