Georgia Perez, VP of Business Development and Product Evangelism | Feb. 12, 2020
It’s no secret when considering a software purchase for your business, price is top of mind. If you’re going to spend money on a resource, it has to deliver a certain amount of value, making it worth the expense. But, did you know by only considering price and anticipated value you could be setting yourself up for unforeseen costs? A software investment should always be considered in terms of the total cost of ownership, or TCO.
The 411 on TCO
Gartner defines TCO as “a comprehensive assessment of information technology costs across enterprise boundaries over time.” Price only takes into account the one-time or recurring subscription fees. TCO includes additional expenses that may not initially be apparent. Simply put, TCO is the aggregate of all costs–either direct or indirect–related to buying, implementing, and managing a software solution over its entire lifecycle.
According to TechnologyAdvice, TCO should be the ultimate driving force behind your purchasing decisions. According to TechnologyAdvice, a TCO analysis is vital “because it determines your ROI. Without a TCO analysis, software can surprisingly cost a business upwards of 5-8x the original purchase price. This difference in expenses can significantly affect a business, its ROI, and overall success and/or livelihood.”
Being able to understand how much software is going to cost your business over the long term will ultimately enable you to make a more confident purchase decision and achieve the strongest ROI.
In this guide, we’ll walk you through the various factors to consider when contemplating a software investment and the components that should go into a TCO analysis.
Searching for Software: Two Common Mistakes
It’s imperative to properly perform a TCO analysis to find the ideal technology platform. But, before diving into what should be considered, let’s start with two common mistakes so you know what to avoid.
- Only Considering Hard Costs
The first mistake a potential buyer often makes is only considering “hard costs,” such as set-up fees, annual or monthly subscription costs, and anticipated upgrade charges. Software license and subscription costs often amount to less than 10% of the total initial purchase.
- Not Forecasting for Disruption
The second mistake is not forecasting for disruption. Any software platform you choose is going to disrupt what you are currently doing so it’s important to not only prepare for that disruption time but also be on the lookout for a product that is going to be the least disruptive and most worth the disruption.
Being aware of these common mistakes and making a conscious effort to avoid them will set you up for success. Now, let’s dive into the components that should go into your TCO evaluation.
The TCO Analysis Guidebook
When performing a TCO analysis, consider the various possible costs in five parts:
When assessing software vendors, it’s critical to understand how each of their cost structures differs so you can ensure your vendor of choice is best for your business. Not all of the costs mentioned below will necessarily apply to your software purchase or specific vendor, but it’s important to be informed of all possibilities to find the software that will deliver the strongest return on your investment.
1. Acquisition Costs
Acquisition costs can be defined as the cost of acquiring the hardware and/or software needed to use the platform of choice. Think of acquisition costs as the one-time, yearly, or monthly price of the software itself. The SaaS pricing model typically includes a fixed one-time fee along with a recurring fee that varies with usage.
2. Implementation Costs
Implementation costs are those costs associated with set up according to your unique business requirements. These include:
- Customization – Will you need the software to be customized in some way? That may require additional development costs. Take into consideration that some systems may be naturally more customizable than others and therefore more cost-effective.
- User licenses – Many cloud-based SaaS offerings charge you based on a per-user license model. (Hint: Inquire about a bulk discount if it’s a system that will be widely used in your organization.)
- Initial training – This can often be the biggest burden of the implementation costs. But, investing in training early on is a valuable way to ensure successful implementation and continued usage.
- Data migration – If you’re transitioning from an older system, does the new vendor charge to transfer data? Be sure to ask what that process looks like and how much it costs. (Tip: you can often take care of it yourself at a much lower rate).
3. Operating Costs
These are the costs associated with keeping the software platform successfully running as your business grows. They include:
- New user licenses – As your business grows you may need to purchase new software licenses down the road. Account for that potential in your TCO analysis.
- Ongoing training – Ongoing training may also be required for existing users as a software system is updated or as those users want to increase their familiarity with the platform.
- Upgrades – While not always the case, some vendors charge for version upgrades.
- Administrative costs – Does your software of choice come with free support? Or, does the vendor charge you for support credits? Be sure to understand what that cost could look like overtime.
4. People/Resource Costs
- Administrator/internal champion – Do you have someone in-house whose full-time job it will be to maintain, support, and promote the software? Or, will you need to hire a new employee to serve as the platform’s administrator?
- Consulting – Some vendors provide consulting services at no extra cost for a few weeks or months after launch. Capitalize on this. However, in some cases, you may feel that your vendor isn’t providing enough resources, and in that case, you may have the added cost of hiring a consultant.
5. Soft Costs
A key piece of TCO analysis is accounting for “soft costs.” These are often the most overlooked parts of an analysis as they’re not easily apparent. According to Gartner, these are the indirect costs of operation that often creep up outside a planned budget. “Soft costs are critical to the understanding of enterprise costs. They represent real expenses and ignoring soft costs will generally cause TCO strategies to fail.” Here are some soft costs to keep in mind:
- Potential downtime – With cloud-based offerings, downtime is rarer than it used to be, but it’s still very possible. Consider the costs associated with not having the software and how its absence would affect your team’s productivity.
- Migration costs – What happens if a better solution comes along that you feel compelled to leave your vendor of choice? Be sure to find out how difficult and costly it is to migrate away.
- Potential disaster – What happens if your vendor goes out of business? Maybe they get acquired and can no longer service your chosen solution. It’s important to think of your vendor as more than just a technology platform. Like you, they’re a business. Do they have a strong management team? Are they well-funded? You should be confident in the vendor’s long-term sustainability before signing on the dotted line.
So, before you make a purchase decision and invest in a software platform, put together your own analysis using some of these factors. Taking the extra time to do a TCO analysis will help you truly understand the impact of your investment, ensuring that it’s on track to deliver strong ROI and lasting results.