Avoid the Two Biggest Mistakes in Software TCO Analysis

An important factor in the buying decision for any large capital purchase is determining the total cost of ownership (TCO).

It’s an imperative assessment if you want to have a system that fits your needs, provides the highest benefit, and has the lowest life-cycle cost of ownership.

For Example:When buying a car, instead of just the selling price, you think about:

Expected breakdown frequency

Repair costs Gas mileage

The same should apply when evaluating a multi-million dollar software investment.

Failed IT investments are often in the news. Knowing how to assess TCO is therefore very important.

Let’s have a look at some common mistakes…

Mistake 1: Only Using Hard Cost Input Numbers

Don’t choose a software because its costs are easy to define and low.

This ignores key factors such as:

How the software sits with users

How easily it can be adjusted

Traditional software was often easily measured, e.g. management software increases output by 10%.

Newer software designs are more complex. They incorporate difficult to quantify factors, such as built in communication.

How will this affect your decision time?

How will this affect your competitive advantage?

Mistake 2: Not Accounting for Unplanned Events

Unplanned events will inevitably change your business plan.

Think of the advent of the internet in the early 1990s.

Think of the explosion of mobile communication in the

last ten years.

How can you prepare for the unexpected?

Establish potential costs for both small changes, as well as core logic changes.

Accept that at some point your software will have to be adapted to meet new conditions.

The Right Way to Build a TCO Model

Application start-up costs: Software licenses Server and infrastructure costs The cost of training users

Costs of adaptation: Expected frequency of changes Cost per change

On-going support costs: Maintenance costs Upgrade costs Internal costs

Organizational benefits: Improved productivity of users Better insights Efficiency of communication Improved management control

There are usually many factors that account for big scope, long term projects getting derailed. The seeds of failure are often planted early.

A complete and proper TCO analysis can help avoid these early sources of project failure.

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