How to Estimate The Duration of Use for Software TCO

Executive Summary

  • Brightwork Research & Analysis uses an assumption regarding how long an application is used.
  • This is a critical point in determining the TCO.

Introduction

How many years the company will use the application is difficult to estimate. The following quotation, which was obtained from interviews on this topic (this source prefers to be anonymous), explains why:

“If the software works well—meaning good confi guration and good training, along with a group of super users—an advanced planning application can be kept in use for seven to ten years. However, if a new CIO comes by, an application’s life can be only three to five years.”

There is really no perfect way to estimate this value, and it is difficult to know how long the application will be in use in the company. Furthermore, an application that does not work very well can be kept too long—often for political reasons— while an application that is working well can be replaced due to issues that are related to what happens to be popular at the time. This was known to be true of i2 Technologies (a supply chain planning vendor), which often had software that was installed and working well at some accounts that we reviewed. However, SAP’s products had become more popular, and so the i2 Technologies products that were functioning fi ne were removed and the SAP products were implemented, often without improving the condition of the company. This decision to replace i2 Technologies’ applications was driven partly by trendiness and partly by concerns about the financial strength of i2 Technologies.

The Limitations of Implemented Applications

Not understanding the limitations of the implemented application is another cause of unnecessary turnover to a new application. After implementing an application, the implementing company becomes familiar with all of the application’s limitations. The marketing hyperbole in another software vendor’s literature starts to sound quite appealing. Furthermore, often apples are being compared to oranges.

Example from a Project

At one of my clients there was dissatisfaction with the current system; however, the system had not been upgraded for roughly thirteen years. Compared to the new system we were installing, it had an old user interface and was dated in some ways. Rather than installing an application, a better choice would have been to simply pay to upgrade the current system, because after several months working with me and seeing all the limitations of the new system, one of the business leads said “can we go back to the old system?” This was said only partially in jest, because the new system was going to set the company back in a number of ways, and it was difficult for me to see how the company was even going to be able to get a payback from the software that I was helping them implement. The older software was a better fit for their needs and they had already been trained on how to use it. Once again, the executives for this company had no idea what they actually bought, but instead had been persuaded to buy the new application on the basis of hype and one particular vendor being “hot” in the market.

How we Adjust Life Expectancy Per Software Category

Our estimates for an application’s life expectancy are adjusted per software category. Our standard estimate is seven years, but we may go longer or shorter depending upon the application type. In some cases we will go with five years or even three years. Because of this variability, the TCO estimate should be given as an average per year (and also an average per year per user) in order to normalize the TCOs between applications in various categories. On the other hand, ERP systems tend to be longer-lived, averaging between eight and twelve years. ERP systems take so long to implement that it’s infeasible to replace them more frequently. On-premises applications tend to have longer lifespans because they are more diffi cult to re-implement; that is, they have more lock-in. SaaS offers the potential of being able to switch between software vendors much more quickly.

The Difference in Lock In with Cloud Versus On Premises

Because they have less invested, SaaS applications have less lock-in than on-premises applications. Generally speaking, the ability to switch vendors easily would be a tremendous benefit to enterprise software because—as has been pointed out repeatedly—many companies frequently make poorly informed software selection decisions and are therefore stuck with a bad application for years. This is, of course, why Excel and Access use is so high in many companies. Excel is used as the patch—the ultimate backup—when the purchased application cannot meet the business requirements.

Number of Support Resources Required for the Life of an Application

Support resources include everyone required to support the application: technical, functional and management. It should never be assumed that the support “load” on internal resources is equivalent, even between applications in the same software category. There is a marked difference between vendors—and the degree to which the applications have been designed to be maintainable. This maintainability can be everything from how easy the application is to use (its usability: more usable applications require less hand-holding to accomplish tasks) to how straightforward it is to update its master data.

Custom TCO Estimates and Consulting

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References

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