Why Software Vendors Don’t Want TCO Estimated

Executive Summary

  • The last thing most software vendors want is an accurate TCO.
  • This article explains why vendors prefer an underestimated TCO.

Why (Some) Software Vendors Do Not Want Accurate TCO (or ROI) Calculated

I did not think I would have to include this section in the book because it’s fairly obvious, but on the other hand, itÕs important that the issue does not go unaddressed. Software vendors with applications that have a high TCO do not want accurate TCO estimates for using its software. For example, software vendors that do not offer SaaS solutions also do not want TCO calculated. TCO research at Software Decisions shows that consistently, the TCO for the exact same application, when delivered as SaaS, is at least half as much as the on- premises version, and often less than half of the on-premises version. The cost advantages occur in an area that is consistently underrated by almost all TCO analyses that I have reviewed, which is the internal cost of support and maintenance.

Let’s take a look into SaaS as an example of why many vendors want to supress TCO estimation. With SaaS delivered solutions, while the internal support requirement does not go away it is greatly reduced. The software vendor has full access to the system at all times as they host it. In fact the widespread adoption of SaaS most likely will transform internal IT in the coming decades, with much of the employment moving from internal IT departments and toward the software vendors. The cost and service advantages are large, with SaaS delivered applications being a much lower percentage of the market for enterprise software than it should be.

What Are the Cost Differentials for SaaS and On Premises?

Not enough businesses are aware of the cost and quality differentials between SaaS and on-premise applications. In fact, in a study by IFS, only around twenty-two of the respondents stated that they were either Familiar or Very Familiar with SaaS. There are challenges to overcome, particularly the necessity to standardize SaaS contracts to prevent the software vendors from selling their clients data, mining it, or otherwise violating their customer’s privacy in the way that Google and Facebook habitually do.

Strangely, in this study cost was listed as a disadvantage to SaaS, which is the exact opposite of our TCO fi ndings. Consistent with the growth of the largest SaaS software vendor, Salesforce, CRM was listed as the most common software category that was used in the SaaS delivery method.

Software Vendors Faking Enthusiasm for TCO

While most software vendors hide their pricing information, all software vendors still like to talk about TCO in the abstract. Being in favor of TCO is like saying you are in favor of the American flag or apple pie; you’re in favor of goodness. You can’t actually find anyone who opposes TCO in principle. But the devil is in the details. As long as nothing is quantified or the TCO studies are rigged, all vendors can say they have the lowest TCO. Most software vendors are not only against publishing TCO estimations, but are even against publishing pricing information for their applications on their websites.

Hiding Pricing Information

The problem with hiding pricing information is that it is used as a control technique by software vendors in order to pry information from the buyers. It also greatly lengthens the process of finding out the pricing information and reduces the comparability of applications. In order to function effi ciently, markets require published price information. There are some laws in the US on this topic for consumer products, but not for products purchased by corporations. On several occasions vendors have sent me non-disclosure agreements (NDA) that covered pricing information. However, this is a misuse of the NDA legal concept, as NDAs are designed to protect proprietary information—technical information, software intellectual property—and not pricing information. The legal phraseology implied that I could be sued for sharing pricing information with a third party if it damaged the company’s business. However, wouldn’t any sharing of pricing information, unless the software vendors were the low cost provider “damage their business?” Pricing information is part of what makes markets work and should be published. There is a very interesting story about the lack of quantifi cation of fees in the mutual fund industry, which has important connections to TCO but in a different realm.

“These include (401k) fees to cover the costs of advertising the plans and the companies who run them, fees to pay various investment managers of the funds in the plan, even fees to cover the costs of buying and selling the underlying stocks and bonds in which retirement accounts are invested. These fees, however, are taken “off the top” of investment returns or share prices—in other words, the rates of return and share prices reported to you in account statements and plan documents are post-fee. Because of this, retirement and bank account statements contain no evidence of these fees, and thus accountholders generally have no inkling how much all of this costs them.” — The Retirement Savings Drain: The Hidden and Excessive Costs of 401(k)s.

Big Vendors Versus Small Vendors

The big vendors that would score poorly on TCO have plenty of resources to calculate TCO, but don’t. It’s like the mutual fund industry, they know the hidden fees in their mutual funds but they are not going to tell you. For example, SAP has the highest TCO in every application category.

Hiding Price Information as a Control Technique

The problem with hiding pricing information is that it is used as a control technique by software vendors in order to pry information from the buyers. It also greatly lengthens the process of finding out the pricing information and reduces the comparability of applications. In order to function efficiently, markets require published price information. There are some laws in the US on this topic for consumer products, but not for products purchased by corporations. On several occasions vendors have sent me non-disclosure agreements (NDA) that covered pricing information. However, this is a misuse of the NDA legal concept, as NDAs are designed to protect proprietary information technical information, software intellectual property and not pricing information. The legal phraseology implied that I could be sued for sharing pricing information with a third party if it damaged the company’s business. However, wouldn’t any sharing of pricing information, unless the software vendors were the low cost provider damage their business? Pricing information is part of what makes markets work and should be published.

Relationship to Finance Industry

There is a very interesting story about the lack of quantification of fees in the mutual fund industry, which has important connections to TCO but in a different realm. These include (401k) fees to cover the costs of advertising the plans and the companies who run them, fees to pay various investment managers of the funds in the plan, even fees to cover the costs of buying and selling the underlying stocks and bonds in which retirement accounts are invested. These fees, however, are taken off the top of investment returns or share prices in other words, the rates of return and share prices reported to you in account statements and plan documents are post-fee. Because of this, retirement and bank account statements contain no evidence of these fees, and thus account holders generally have no inkling how much all of this costs them.

The Mega Vendors and TCO

Well, if the mega vendors don’t want TCO to be known, how about the smaller vendors that tend to have much lower TCOs? Certainly they would want their TCO to be published as widely as possible right? Interestingly, the smaller best of breed vendors often do not allocate resources to calculating TCO.

There is also the realization that the numbers produced by the software vendors themselves will be taken with a grain of salt. It is certainly not diffi cult to find examples of software vendors creating false financial estimates for their clients in order to promote sales. I used to work for one of these companies and witnessed this firsthand (although I am happy to say I never participated in or supported this). The software vendor i2 Technologies offered something called a Strategic Opportunity Assessment (SOW), which estimated the financial implications of using its software.

“Another company, whose i2 deployment was two years behind schedule because of problems with i2 software, told Nucleus the following I2 did an ROI calculation for us during the sales process it was very positive. But based upon our experience now, we will [independently] evaluate ROI in the future.” – Nucleus Research

How any company could actually believe a TCO or ROI study developed by a software vendor and which is part of a vendor’s sales process, is well, strange. In a surreal turn, this company also priced their software based upon this value estimation. Talk about a conflict of interest! The following quote from Nucleus Research is educational:

“One customer, that is still cited on the i2 Web site (2003) as a success story but stopped using i2 more than a year ago, told Nucleus: ‘What killed the ROI was the fact that i2 priced their modules based on an ROI calculation that they themselves estimated during the sales process. (i2 stated) that this would lead to $40 million in benefits. There are definitely benefis to the solution, but their pricing is too high. Sometime, I should take the time to contact i2 and say you really need to look at your pricing.’”

Analyzing The Vendor TCO Estimates

Some vendors still produce TCO calculations and we have analyzed a number of these TCO calculations. In fact, we have used some of these estimations for our own estimations and have found some good and some bad in how they were put together.

Several of the most obvious issues are listed below:

  1. We have yet to come across a true “TCO” produced by a vendor. While a few have been accurate in several respects, they did not estimate the client’s cost of either working on the implementation or maintaining the application. However, the TCO is literally that; it must be inclusive of the entirety of costs to bring the application into the company and to keep it running, and even to decommission the application. I have certainly appreciated the work put in by software vendors to estimate some of the costs, but it is confusing to see “TCO” in a publication’s title and then read the following “…does—NOT—include analyst costs, IT costs, local data management costs, etc.” One could imagine the following riddle: “When is a TCO not a TCO? When it does not include all costs.”
  2. Vendors have a strong tendency to underestimate the duration of the software implementation. When I review actual implementations, they are much longer than estimated. It may certainly be true that the application could be installed as quickly as estimated in a laboratory environment, but companies are not laboratories. Some vendors (other than those like SAP and Oracle, both of which have business models of long implementations due to the needs of the consulting companies to which they outsource their consulting), will complain that the client is really what holds up the implementation. This is a bit like a doctor complaining that if only patients had medical degrees, he or she could see many more patients and get through the day faster. It’s simply not relevant to the question of duration estimation. The following statement is included on the TCO questionnaire that we give to vendors: “Please use historical timelines rather than ‘optimal scenario’ timelines.” Therefore, the knowledge level of the client and the time required for knowledge transfer must be estimated, along with all of the other realities of projects. Another example of this is integration. IT departments are slow to respond with extract creation. This was true when I began working in IT back in 1997 and it is still true today. Many integration estimates provided by vendors do not include the time for the IT department to create the extracts to feed the pre-written adapter. A vendor may have a very nice adapter, but that does not change the fact that extracts must be written.

Conclusion

I have continually run into this problem of accurate implementation estimations, whether working for or outside of software vendors. When I worked for a software vendor, I had constant debates with software salespeople who—although never having worked on an implementation themselves—felt qualified to provide estimates to clients regarding how long implementations would take. When the implementation team shows up, usually they must adjust the implementation duration estimates that were given to the client (particularly if the implementation project manager was never consulted prior to providing the estimate, which can happen). During an internal presentation to salespeople, one salesperson stated that the company was moving toward “two-week implementations.” Typical implementations for this software were in the range of four to eight months.Software vendors want underestimated TCO because it reduces the barrier to sales. The vendors that benefit the most from this approach is the vendors with the highest TCO.

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Reference

TCO Book

TCO3

Enterprise Software TCO: Calculating and Using Total Cost of Ownership for Decision Making

Getting to the Detail of TCO

One aspect of making a software purchasing decision is to compare the Total Cost of Ownership, or TCO, of the applications under consideration: what will the software cost you over its lifespan? But most companies don’t understand what dollar amounts to include in the TCO analysis or where to source these figures, or, if using TCO studies produced by consulting and IT analyst firms, how the TCO amounts were calculated and how to compare TCO across applications.

The Mechanics of TCO

Not only will this book help you appreciate the mechanics of TCO, but you will also gain insight as to the importance of TCO and understand how to strip away the biases and outside influences to make a real TCO comparison between applications.
By reading this book you will:
  • Understand why you need to look at TCO and not just ROI when making your purchasing decision.
  • Discover how an application, which at first glance may seem inexpensive when compared to its competition, could end up being more costly in the long run.
  • Gain an in-depth understanding of the cost, categories to include in an accurate and complete TCO analysis.
  • Learn why ERP systems are not a significant investment, based on their TCO.
  • Find out how to recognize and avoid superficial, incomplete or incorrect TCO analyses that could negatively impact your software purchase decision.
  • Appreciate the importance and cost-effectiveness of a TCO audit.
  • Learn how SCM Focus can provide you with unbiased and well-researched TCO analyses to assist you in your software selection.
Chapters
  • Chapter 1:  Introduction
  • Chapter 2:  The Basics of TCO
  • Chapter 3:  The State of Enterprise TCO
  • Chapter 4:  ERP: The Multi-Billion Dollar TCO Analysis Failure
  • Chapter 5:  The TCO Method Used by Software Decisions
  • Chapter 6:  Using TCO for Better Decision Making

How It Works

How It Works

Each TCO calculator is self-service allowing you to continually change different elements in order to see the impact on costs. They are designed to adjust to the specific project factors such as the number of users, the general level of customization, the number of post go live adjustments to the application, etc..

The TCO calculators can improve your ability to plan your purchase.

How It’s Unique

How It’s Unique

Our self-service calculators have been developed through detailed analysis verified by many years of project experience combined with all the available research – all in order to develop a series of uplifts to costs based upon inputs. The formulas used are nuanced, and do not simply “scale” in direct proportion with changes to the inputs.

  • Our TCO calculators are designed to scale to any sized implementation and different levels of implementation complexity and customization.
  • We offer a true TCO by estimating internal costs (such as the time spent by internal resources on implementation and support) as well as the external costs. In comparison with the very limited TCO studies that exist on enterprise software, our TCO calculations are easily the most comprehensive.
  • Having performed this analysis for many applications, we have brought key observations between these applications as well as between various software categories.

What Is Included

What Is Included

Each package is a combination of two analyses. The first analysis is the interactive TCO Calculator which is provides a total TCO based upon the individual costs of software costs, hardware costs, implementation costs, maintenance costs as well as Lifetime Improvement Costs (the costs of the estimated improvements and adjustments to the application over its lifetime). Both these individual component costs as well as the aggregate of all the costs constantly change given your input to the calculator.

What It Is

What It Is

This offering provides buyers with the detailed information they need to for both the total cost of ownership of a single application, as well as the comparative total cost of ownership between multiple applications. This is the only self service TCO calculator that exists on the Internet, and it is available currently for 57 of the most well known enterprise software applications. This calculator receives input from you and automatically adjusts the costs so that they are customized for your intended way of implementing and using the software.

Transforming a Complex Analysis into a Simple Cost Breakdown

Even though all of the calculations behind each TCO calculator are complex and have been extensively tested and validated, they are easy to use. All that you need is basic information about your project such as the number of projected users, whether the implementing is more simple or more complex, etc..

Each package covers a single application including a comprehensive total cost of ownership analysis that takes into account the following costs:

  • Software Costs
  • Hardware Costs
  • Implementation Costs
  • Maintenance Costs
  • Lifetime Improvement Costs