CALCULATING TCO FOR PERFORMANCE IMPROVEMENT ERP, CRM OR BI | The Business Management Blog

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“This Code is like Soduko, but with Fractions!” Or Seven Factors to Consider When Calculating Total Cost of Ownership (TCO) for Performance Improvement ERP, CRM or BI Solutions…

2/28/2012 at 6:54 am by

The quote in this title is from my favorite television show, “The Penguins of Madagascar”. With a seven year old in the house we watch a lot of cartoons (although, often times I can be found alone watching Penguins. It’s just so darn funny.) Sometimes calculating the total cost of ownership of software investments can seem like trying to solve Soduko puzzles with fractions.  There is no broadly accepted formula to calculate TCO (total cost of ownership) for business management software, because an organization must consider all relevant costs related to an asset purchase and full expected lifecycle—making the calculations a bit subjective. Math is already confusing enough (yes, I am blonde) and now you want me to calculate something without a proven mathematical equation. Is there no axiom or definition that can help? No. But there is some logical reasoning to be considered, which will help you get very close to an equation.  Here are seven factors to consider when calculating the TCO of a software purchase:

  • Basic Software Price (ALL Application Licenses): This is where most people start when considering TCO of technology, factoring how the cost of licensing affects routine programs, such as word processing, spreadsheets or e-mail, all the way up to ERP and mission-critical tools.
  • Database Licenses: Some applications require additional database software at an extra cost in order to use the applications themselves. Many ERP applications, for example, require licenses for some a database, including Microsoft SQL Server, IBM DB2, MySQL, Linux or Oracle.
  • Infrastructure: This encompasses the hardware and software located throughout a business, including workstations, servers, processors, memory, and licenses. In addition, a new application might require a dedicated application or web server to effectively handle requests from its users. Don’t forget to consider hardware upgrades if the asset lifecycle is expected to span over the course of several years.
  • Upgrades, Maintenance, and Support (also called Software Assurance or Business Care): Need a program fix, a minor improvement update that, or additional functionality? If so, most applications charge anywhere from 10 to 25% of the current retail cost per year to maintain a software maintenance plan.
  • Professional Services: The cost of any outside assistance must be considered, including implementation, customization, integration, and data clean-up, migration or conversion. Don’t forget project management here!
  • Internal Staff Deployment: This includes administrators, project managers, developers, and expert report writers. These are the people that enable your organization to access applications concurrently, as well as get the ongoing support to ensure maximize uptime.
  • Training: Once everything is deployed – and users are ready to access the application – you still need to prepare them on how to use it. It is critical to get the most of the tool you have selected in order to maximize your ROI.

Now add these all together and you get your TCO! Easy, peasy, rice and cheesy. Right? Consider also, my favorite Penguins quote: “In case of a loss of oxygen, please place your masks over your faces to hide your terrified expressions from the other passengers.” Next week we will discuss TCO’s very important cousin TVO! As you cannot forget to calculate in the cost not to solve your business challenges, or the ROI of the business challenges solved! Yes, it takes work and some math, but calculating TCO is well worth the effort involved. Would you add anything to my list of 7 areas to consider? Have you used any great ROI or TCO calculators that you can share?

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