How to Use Independent Consultants for Software TCO

Executive Summary

  • Can independent consultants be used to produce TCO estimates?
  • This article is an overview of how to leverage TCO.

Introduction

A company that is purchasing software may use this book or other sources to develop their own TCO. Generally, however, this is not a good idea. Purchasing companies do not have the experience with the application, and this experience is a critical component of performing the analysis. Optimally an IT analyst firm would provide TCO analyses, as they have the broadest database of TCO data points. The problem is that the cost of TCO analysis or really any consulting from the major IT analyst firms is often exorbitant.

I am concerned that the consulting business that the IT analysts would receive from the vendors would pollute their TCO analyses. I am also concerned that IT analysts would not fully divulge the criteria that made up their TCO method, claiming that method as proprietary; instead, they would just share the results. This issue of not sharing the details of the research is documented in this book. The sweet spot for IT analysts is not in doing detailed analysis, but in leveraging their very large network of clients in order to get to the bottom of TCO. However, because IT analysts do not actually work on projects, they have a higher-level perspective and they don’t get the exposure to the reality of working on projects.

Contacting a Consulting Company

If you contact a partner at a major consulting company who works out of the SAP practice, you will hear about the great benefi ts of SAP. If you contact a partner who works out of the Oracle practice—you get the idea. So, if neither consulting companies nor IT analysts can be relied upon for dependable TCO analysis, then whom can a company turn to? I recommend independent consultants. One might observe that because I am an independent consultant myself, that my recommendation is an example of bias on my part. However, I was not always an independent consultant. One of the reasons I am an independent consultant is because I was repeatedly directed to do all the wrong things by major consulting companies that were intent on using me to distribute false information to their clients. I documented these experiences in an article, which I have included at the article.

I am skeptical of information that comes from any of the major consulting companies—and many of the smaller ones. I saw how they undermine the analysis and twist it in order to meet a predetermined objective, even when they have a person like me who is known for analysis. As an independent consultant, I am insulated from the corrupting infl uence of partners or other high-level individuals at consulting companies or at vendors that have steep sales quotas.

The Best Case Scenario

The best-case scenario here is to find an independent consultant through something like LinkedIn. An independent consultant’s experience in an application can be verifi ed by the software vendor. However, a few rules should be followed to ensure that you control for bias as much as possible.

  1. The independent consultant must have writing and analytical skills. There are many types of skills available on the independent market. The most common type of consultant is a pure configuration consultant. This type of consultant knows the switches to turn on and off in the application in which he or she specializes. The consultant tends to have moderately good communication skills (the communications skills are often limited by the necessity to also have the ability to grasp the complex configuration of an application), but do not generally perform TCO analysis. A good choice is a consultant with a mix of implementation experience and analytical experience.
  2. The independent consultant should have many years of experience. This is important because when one is younger, it’s more diffi cult to see consistencies between many implementations; younger consultants do not have broad experience on a large number of projects. Part of what you are hiring this consultant for is his or her personal database of projects of a similar type.
  3. When the independent consultant is hired, it should be made clear that the consultant will only participate in the TCO phase. If the independent consultant believes that he or she may gain more work after the selection, this knowledge will bias the independent consultant most likely in favor of the software vendor—so that he or she can then work on the implementation. Single sourcing in any service area is truly a recipe for failure. Hiring more experts for smaller pieces of work is a more effective strategy, because it allows you to triangulate the information that is received from different entities. I do this myself when I hire attorneys or CPAs. There are various levels of expertise, and no one knows everything. It’s very easy to move outside of the service provider’s area of expertise, where another expert is a better choice.
  4. When searching for an independent consultant, it’s important to fi nd one with exposure to several applications in the area so that the consultant can compare and contrast for you the different applications. During software selection, multiple companies present to the prospect, and the independent consultant that you choose should be familiar with several of these applications.
  5. During the interview with the independent consultant, determine if the consultant can see the positives and negatives of the applications that he or she will be helping you evaluate. If the consultant is simply a cheerleader for one application, then he or she will not be able to help you, even if quite knowledgeable in the technology.
  6. Independent consultants move from project to project. TCO or ROI work, because they are shorter projects, are not as desirable to consultants as implementation projects, which are much longer contracts.

Consultant

You cannot expect an independent consultant to be available exactly when you want to review software vendors. However, you can hire independent consultants part time and remotely. That means they educate you remotely, listen in through a conference call, view the demo through a web conference, and review the material given to you remotely. This remote approach is quite a bit more cost effective and most independent consultants are amenable to this arrangement. On the other hand, if the independent consultant is available to work full time, there are advantages in that the consultant can provide a general education about the software category and can help with structuring the analysis for the software selection. In many cases, executive decision-makers are busy attending meetings or with other operational tasks, and employing someone who can really concentrate on the software selection can provide benefits.

Of course, the problem arises when no independent consultant can be found who has experience in the particular software that is part of the TCO. This is the case with smaller applications where the independent consulting market is simply not well developed. In this case, the best that can be done is to find an independent consultant with similar experience and exposure.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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
Categories TCO

How to Understand the Basics of Software TCO

Executive Summary

  • Brightwork Research & Analysis has observations regarding software TCO.
  • This article is an overview of how to leverage TCO.

Introduction

Total cost of ownership, or TCO, is the complete cost of owning something. TCO can be rearward looking—an accounting of what a purchase actually cost. However, in most cases a TCO analysis results in a forward projection or forecast. TCO for enterprise software is the overall sum of the costs of the four main TCO categories:

  1. Software Cost
  2. Hardware Cost
  3. Implementation Cost
  4. Maintenance Cost

TCO is discussed in the abstract as a “good thing” but is rarely calculated in reality. If you think back upon all of the purchases you made throughout your life, how many of them included the TCO on the price tag, along with the actual purchase price? There is a good reason (or good reasons) for this and they go by the names of sales and marketing. The last thing a company wants is for their prospective customers to know the total cost of an item. The one exception to this rule is if the vendor has a study that shows their product or service has a lower TCO than that of a competitor’s product or service. TCO is the base value for ROI: it is the “I” in ROI. A TCO must be calculated before an ROI can be calculated. ROI is the formalized analysis of the universal ratio between costs and benefi ts, which I referred to previously, and is focused on both the revenue and the costs of an investment.

Determining the ROI of Enterprise Software

Determining the ROI of enterprise software is quite difficult because it means estimating the financial returns from software, which is a complex endeavor. Therefore, instead of producing ROI estimates, Software Decisions applies a rating system to the application, which is used in conjunction with the TCO estimate. This still allows the value of the software to be estimated, but without the necessity for an ROI calculation. Correct TCO analysis requires effort; getting into the real detail of the costs and benefi ts of applications requires a combination of first-hand implementation experience as well as the analytical ability to perform the analysis. This analysis should be built from a level of detail such that the TCO flows naturally from the more thorough analysis. While most software vendors hide their pricing information, all software vendors still like to discuss TCO in abstract terms as a “good thing.”

Virtue Signaling with Being in Favor of TCO

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. Software vendors cannot be relied upon to produce TCO estimates, and the best move is to disregard the software vendor’s estimate.

Secondly, no TCO study that is performed by a third party, but which is funded by a software vendor can be considered reliable. This should be obvious, but I have read the TCO estimates performed by third parties, which were funded in exactly this way, so someone is funding this work for a reason, and it is evidently convincing to someone. Behind many poor decisions is a lack of proper TCO analysis, many consulting companies are also behind poor decisions. Consulting companies don’t share the economic benefit of their clients’ good decisions, and therefore are not incentivized to promote good decision-making on the part of their clients. If the consulting company is involved in the implementation (and almost all of them are), then having the consulting company performing the TCO violates the rule that was described in the beginning of this book, which is that any TCO analysis—or in fact any analysis—is that the entity performing the analysis must not have a vested interest in its outcome.

The Behavior of Consulting Companies and TCO

Consulting companies are constantly putting out falsified information about the cost saving benefi ts of both ERP and outsourcing—which is not surprising as they are knee deep in selling these services. Software vendors and consulting companies are not the only entities that seek to suppress TCO estimations, but IT analysts and buying companies often have little interest in this information, as well. Several entities disagree on whether or not a full TCO analysis should be a goal. In this section we will review the concerns leveled frequently at TCO. One of the entities—which could be labeled as anti-TCO and is infl uential in the area of enterprise software decision-making—is Forrester, the IT analyst fi rm. In the field of enterprise software, one of the most amazing stories of the past several decades is the mass purchasing of ERP systems—purchases made without the customers searching for evidence that ERP systems are good investments.

If they had looked, they would have found that the logic presented to sell ERP systems had no evidence to support it. Costs are often described in general parlance as the amount that we pay for things. However, economists look at costs quite a bit differently. Promoters of ERP tend to present any benefi ts of ERP without acknowledging that the time and effort spent on the ERP project could have gone into other initiatives. The comparison should be between the gains from those systems versus the gains from ERP systems. Multiple estimations from software vendors cannot be simply accepted, but must be blended with experience in implementation. Many software vendors quote a 1:1 ratio between software costs and consulting costs. However, this is not the extent of implementation costs. Software vendors only consider their consulting costs (although sometimes they add in training) and do not include internal resource costs for the implementing company. Generally, consultants from the software vendor provide the best consulting value. As soon as an outside consulting company is involved, the costs of the implementation go up. Therefore, to account for all of this, Software Decisions uses higher multiples if a client states that they are using a major consulting company, and companies performing TCO analysis themselves should do the same. Most vendors would not be happy with the implementation duration estimates developed by Brightwork Research & Analysis. However, these estimates are based upon years of analyzing how applications are actually implemented, which is far from the optimum values that are often quoted. We have performed the research, and the statistics are clearly on our side—enterprise software implementations take much longer than is generally assumed, not only by the software vendor, but also by the project management of the implementing company. If sixty percent of ERP implementations fail, and if the vast majority of ERP implementations miss their deadlines by signifi cant durations, why are TCO estimates still based upon assumptions that do not include these very critical factors? Ninety-six percent of ERP implementations include moderate to extensive customizations.

Customization and TCO

Customization results in high implementation costs, high continuous improvement costs, and high maintenance costs. Other software categories have various degrees of customization— almost always less than ERP—so ERP should receive the highest bump for coding-related implementation costs. All TCO estimations are based upon some type of duration, that the company uses the application. While different software categories have different average usable durations, there is really no perfect way to estimate this value, and it is diffi cult 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. 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.

Specific Versus General TCO

Developing the TCO estimations is the difficult part. The more interesting part is actually using the TCO, as there many varied uses. TCO can be used specifically or generally. For instance, once one has a handle on TCO for an application area, the TCO can be used to make future decisions after the purchase has been made. After TCO is developed, it can be put to use in supporting decision-making in a variety of ways. Companies should really have TCO analyses performed for all of their applications. It is quite common for companies to make decisions to extend use of their ERP system in some area, usually functionality that is known to be mediocre; however, the decision is driven by the desire to “get more value from our ERP system” or to “leverage our ERP investment.” These can seem like desirable goals, until one begins to look through the lens of TCO. Overall, “leveraging” any current software, be it ERP or other software that the company owns, will not typically save the company more than fi fteen percent of the TCO of the functionality in that area.

Strangely, companies do not estimate their probability of success prior to deciding which project to fund. Instead they take the naive assumption that all projects will succeed, even though IT projects have a high failure rate, even if the exact failure rate and the definition of failure is most often not specified.

Cloud TCO

To make the SaaS TCO estimation fit with the on-premises TCO estimations, it is necessary to add cost categories, which allows both TCO and on-premises solutions to be compared side by side, even though they do not have the same cost components. Simply comparing total costs for each delivery method is the most important issue. Effectively comparing on-premises solutions to SaaS solutions will be an important goal in the future as SaaS increases in popularity. In fact, our view is that a primary reason why SaaS is not more popular is that companies simply are not aware of the substantial cost benefi ts to SaaS-delivered solutions. There are signifi cant differences in how long it takes to implement various applications. Some applications are naturally easier to set up. Other applications are simply designed to enable the vendor to say they have certain functionality. Instead of relying upon good software design, vendors rely upon aggressive sales, paying off Gartner for a good rating and/or their partnerships with consulting companies to get their software sold. Therefore, any TCO evaluation means spending time with the application, either implementing the application or using the application in a real-world setting such as testing the introduction of new master data into the application and rating the diffi culty, or asking the vendor to demonstrate specific functions, which can prove out the implement-ability and usability of the software. One of the most commonly underestimated areas of TCO is the internal maintenance costs. The same issues that apply to the training apply here. Software that is diffi cult to implement is also diffi cult to maintain and vice versa.

The Dominance of Maintenance in TCO

Companies that breathe a sigh of relief after a difficult implementation probably shouldn’t because the implementation difficulty is often—although not always—a good indicator of how much work will be required to maintain the application. Adjusting for the number of users is, of course, extremely significant for any TCO analysis, because the number of users is one of the most important drivers of cost. Applications scale in cost as the number of users increases. Therefore, a TCO that assumes 100 users will be higher with only 10 users—although the costs will not scale in a linear fashion. In fact, other things being held equal, the higher the number of users, the lower the user cost per user. However, the per user cost is not helpful for making value comparisons between software categories, because different applications vary quite significantly based upon the type of application. For instance, the categories of software that are most broadly used are ERP systems and reporting/business intelligence systems, while the categories of software that are used most narrowly include specialty applications such as supply chain planning.

Conclusion

This highlights a main theme of the book that while one TCO study can be useful—which is how TCO is primarily used—its usefulness increases greatly when TCO is performed for many applications and for many software categories. The most important conclusion from the research for this book is that companies do not do anywhere enough to leverage the power of TCO for their decision-making.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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
Categories TCO

How to Combine TCO Analyses for a Complete Enterprise Solution Architecture

Executive Summary

  • Brightwork Research & Analysis combined TCO can be used to combine multiple solution architectures.
  • This is a critical point in determining the TCO.

Introduction

TCO presents an opportunity far greater than that presented by its general interpretation. TCO is often discussed in terms of its value for doing things such as assisting with the decision regarding a specifi c application. As such, many people—and this is true even of proponents of TCO—often frame the benefi ts of TCO far too narrowly. In fact, there is no reason to limit the use of TCO because TCO can assist in selecting the overall enterprise software strategy for a company. That is, TCO can be used to compare multiple applications to make decisions between different software categories.

Cognitive errors that allowed ERP to flourish were due to a lack of overall analysis and to the “advice” that was provided by biased parties, including advice from those who accepted direct payments from ERP vendors and guidance from consulting companies that make enormous sums of money from ERP implementations. The review of the research, which is explained in the book, The Real Story Behind ERP: Separating Fact from Fiction, demonstrates that none of the projections for ERP came true.

ERP’s Feeble Foundations

These projections were always based upon a feeble logical foundation, and although the logic used to sell ERP was based upon rosy projections, the vast majority of companies lacked the internal research capabilities to validate these claims. One type of analysis that was not done (and more shockingly, was not done even decades after the research became apparent on ERP) was TCO analysis. Most companies bought ERP systems on a combination of blind faith and the need to signal to a variety of parties (the stock market, suppliers, B2B customers, etc.) that they were making intelligent and forward looking decisions. After we reviewed all of the research on the topic, it became clear that ERP did not improve the operations or the fi nancial performance of companies. As a result we decided to add several TCO estimators to the Software Decisions website. One of these estimators compared a non-ERP solution to a one-hundred-percent best-of-breed solution. In order to build this estimator, we:

  1. Estimate the TCO for each of the individual best-of-breed applications.
  2. Estimate the TCO for a one-hundred-percent ERP vendor solution. This would include the ERP system combined with the ERP vendor applications outside of ERP (business intelligence, advanced planning, CRM, etc.).
  3. Estimate the functionality, implement-ability, usability and maintainability differential between the best-of-breed master solution (the one-hundred percent best-of-breed solution) and the one-hundred-percent ERP vendor solution.

In addition to this comparison, we added another TCO estimation that compares a one-hundred-percent best-of-breed solution from a Tier 1 vendor to a combination of a Tier 2 ERP vendor with best-of-breed applications connected to it. This would give us three points of comparison. Once we estimated TCO for these three points of comparison, along with application estimations in the areas of functionality, implement-ability, usability and maintainability, we would be in an excellent position to provide the highest level of advice on solution strategy to companies.

The Combined Enterprise Evaluation Method

To accomplish the above, it was necessary to find and calculate the TCO for multiple software categories—in fact for most of the commonly implemented software categories. There are, of course, several challenges to doing so. First, we had to adjust the Software Decisions TCO method for different types of cost drivers. Software vendors have many different categories of costs, and not all software vendors use the same categories. Therefore normalizing of TCO estimations across many different software vendors is necessary. Normalization is necessary across many of the cost categories, and giving any one vendor a cost advantage can tilt the decision-making in their favor.

For example, even within one software category, implementation times can vary greatly. The average estimated implementation time must be reflected in the TCO estimations for vendors with applications that are diffi cult to implement. The fact that this normalization has historically not been done means that many vendors get away with delivering software that implements poorly—a fact that cannot be determined by simply reviewing a demonstration provided by a presales consultant. And it should go without saying that implementation success and implementation timelines are probabilistic. That is, TCO—as traditionally practiced—relies upon the assumption that all of the implementations will be successful and that the probability of success is equal between all applications. However, a TCO estimate without an approximation of the project’s risk makes little sense. In fact, a failed implementation can have a “low TCO” if the buyer decides to cut their losses. Strangely, companies do not estimate their probability of success prior to deciding which project to fund. Instead they take the naive assumption that all projects will succeed, even though IT projects have a high failure rate, even if the exact failure rate and the definition of failure is most often not specified. And this is not the end of the issue, because some live applications have been either significantly delayed or re-implemented.

According to IDC, fifteen percent of survey respondents re-implemented their ERP software. However, in all the many TCO estimations that I have reviewed from other sources, I have yet to see a TCO that included the risk of either project failure or re-implementation. Entities that perform TCOs clearly have a strong tendency to assume perfect-world scenarios and with an assumption of one hundred percent implementation success. This faulty assumption reduces any interest to determine the differential risk between both the various applications that are part of the software selection, as well as the functionality employed by each of the applications.

The Normalization Adjustments

The adjustments below were developed over time by simply comparing what facilitated cross-TCO comparisons:

  1. Calculating the TCO Per Year
  2. Adjusting for Differences Between SaaS and On-premises Solutions
  3. Adjusting for Implementation Duration Differences
  4. Adjusting for Training Cost Differences
  5. Adjusting for the Internal Support Costs Differences
  6. Adjusting for Differences in the Number of Users

Calculating the TCO Per Year

A major issue in any TCO analysis is how long the application is used. If one TCO analysis assumes six years, while another assumes eight years, the software license and implementation costs are not amortized across the same number of years. Generally, the number of years should be kept consistent within a software category, but must be allowed to vary between software categories. For instance, ERP systems tend to have the longest implementation timelines of all enterprise software categories. In fact, ERP systems also tend to be the longest-lived enterprise applications with lifespans in companies averaging around ten years. It is also useful to break the TCO down to a per year value.

Adjusting for SaaS Versus On-premises Solutions

SaaS solutions have far fewer components to calculate than on-premises applications. In addition, the SaaS software vendor takes more of the risk on these costs, but because of their superior knowledge, they are in a much better position to do so. In this way, SaaS has a major advantage over on-premises solutions, and while this has been known for some time it has not been leveraged all that much by companies; as of the publication of this book, SaaS still only represents roughly four percent of all enterprise software revenues, something that was predicted to be much larger by this point. Something that SaaS vendors need in order to quickly increase the adoption of SaaS software is adherence to an ironclad privacy agreement so that they do not mine or sell the corporate information in the same way that is essentially part of the business model of Google and Facebook—but this is a large issue that requires an as yet unwritten book that combines a knowledge of law along with knowledge of SaaS/cloud delivered solutions. To make the SaaS TCO estimation fit with the on-premises TCO estimations, it is necessary to add cost categories, which allows both TCO and on-premises solutions to be compared side by side, even though they do not have the same cost components. Simply comparing total costs for each delivery method is the most important issue. Effectively comparing on-premises solutions to SaaS solutions will be an important goal in the future as SaaS increases in popularity.

Popularity of SaaS/Cloud

In fact, our view is that a primary reason why SaaS is not more popular is that companies simply are not aware of the substantial cost benefi ts to SaaS-delivered solutions. Adjusting for Implementation Duration Different categories of software have different expected durations for implementation. For instance, SAP ERP, and big ERP in general has a very long and often painful implementation duration. The duration of implementation of supply chain planning software can be long, particularly if complex methods are used. However, bill of material or recipe management applications are relatively quick to implement. Reporting applications can be implemented quickly if the application has a self service capability and orientation, or can be one of the longest implementations second only to ERP system. However, the determination of when the system is live must be when they are used to develop some substantial reports that meet business requirements, not when they are used to create some easy report.

Amid all the discussions regarding “analytics” and “Big Data,” some on-premises business intelligence applications take a very long time to deliver usable reports. Furthermore, there are signifi cant differences in how long it takes to implement various applications. Some applications are naturally easier to set up. Other applications are simply designed to enable the vendor to say they have certain functionality. Instead of relying upon good software design, vendors rely upon aggressive sales, paying off Gartner for a good rating and/or their partnerships with consulting companies to get their software sold. Therefore, any TCO evaluation means spending time with the application, either implementing the application or using the application in a real-world setting such as testing the introduction of new master data into the application and rating the difficulty, or asking the vendor to demonstrate specifi c functions, which can prove out the implement-ability and usability of the software.

Adjusting for Training Costs

Different software categories have very different training costs because some enterprise software is simply easier to use than other software categories. Additionally, within the same software category, some software can be easier or more diffi cult to use. Training is typically estimated by multiplying the number of users who will receive training by the average training cost. However, this brings up the question of how many “courses” the users must take. On some projects, we have seen the frustration on the part of the company—often IT—that the users are not “getting” the system, and should be sent again to training. The short-term impact of training is greatly overestimated. Even after training, it takes considerable time until users reach their maximum effi ciency with an application. Also, IT seems to treat all applications as equal in terms of usability, when in fact they are incredibly different. I have pointed this out in previous books, but I am in no way exaggerating when I say that at Brightwork Research & Analysis we can do a number of things with regard to forecasting using an inexpensive demand planning application that the largest multinationals cannot do, chiefly because we test a demand planning system that grades well in multiple aspects—and then we use those applications. We require very little training on this application; in fact, most of the training we have had has been on the software’s advanced functions. Some of these specifi c items that so many companies have problems with in regard to forecasting software are explained in the  book, Supply Chain Forecasting Software.

Bad Software

Bad software tends to require the most training. A good indicator of this is if users don’t really use the software even through they have been sent to training. IT resources and decision makers will typically pin this on the fault of the users— with the remedy being that “they must be retrained.” However, in most cases, IT is simply living in denial. It was part of the software selection process to include whether the users would be able to properly use the system. This should bring up the question as to whether users were even involved in the software selection decision—and in many cases they are not. A frequent mistake that companies make is not including the usability of the application into their software selection process. Instead the decision to purchase software is often made by executives who will never use the application. Software vendors with poor usability often do everything in their power to exclude users—knowing they will not be able to win them over. This is explained in the book, Enterprise Software Selection: How to Pinpoint the Perfect Software Solution using Multiple Information Sources.

“Users need to be included in the audience during the demo, and their opinions should be solicited after the demo. Would they personally want to use the software? They should also be told to ask questions whenever they see fit and not at the end of the demo only. Users will pick up on things that executives will not. There is absolutely no logic to exclude the eventual users from a demo. When I worked at i2 Technologies, I recall that on one account the presales and sales team convinced the potential customers to keep users out of the demos. The sales and presales team explained to me that they knew the particular software they were showing was weak and that they would not be able to answer users’ questions, so they needed to, in their words, “sell directly to the top.”

Excluding Users from the Software Demos

In fact, too often the users are excluded from the demo, meaning that the demo tends to be a high-level affair. However, it is the users who ask the most pertinent questions related to how the software would be used in an everyday setting. Furthermore, the executives often do not even account for usability in their decision-making process, and then assume that users will quickly learn a system that is difficult to use.

“Companies reported that, following initial training, it took users anywhere from several months to an entire year before they were entirely comfortable using the application.” — Nucleus Research

Companies that exclude users from software selections should not be surprised when the users do not take to the application. Instead, the executive decision makers should say to themselves “of course.” However, they don’t; instead blaming the users or blaming Excel. At one client, a technique to force the users to use the ineffective solution that they had spent large sums of money on was to simply remove Excel from their users’ computers. In addition to the variability in training requirements between applications, some vendors have expensive training—expensive in terms of what the software vendor charges and in terms of the travel and time commitment.

However, a few vendors (such as Demand Works) have come up with a creative way of reducing training costs by providing remote training that is partitioned out over time in smaller increments, a method that tends to enhance learning greatly and that is consistent with the continuous improvement principles that recognize that learning does not occur immediately and that users can only absorb so many new things in any interval. Much software training is very intensive and can leave the users overwhelmed. When they return to work the week following an intensive off-site training session, they find themselves further behind the work of their full-time job, and many of the things they learned will often quickly dissipate. When calculating a training cost, it is important to factor not only the complexity of the software, but the design of the software, as well as the training model of the software vendor. For this reason, we have developed three different training multiples to be applied to the number of users of any implementation: Easy, Medium and Hard. Based upon this rating system, we assign a different training multiple to each application for which we create a TCO, and therefore a different cost.

Adjusting for the Internal Maintenance Costs

One of the most commonly underestimated areas of TCO is the internal maintenance costs. The same issues that apply to the training apply here. Software that is difficult to implement is also diffi cult to maintain and vice versa. Companies that breathe a sigh of relief after a difficult implementation probably shouldn’t because the implementation diffi culty is often—although not always—a good indicator of how much work will be required to maintain the application. The relative ease of confi guration, master data manipulation, and troubleshooting are all factors that we include in our estimates of how many people—and their percent allocation to the application and its integration and associated support— will be required for the life of the application in the implementing company. How the application support is staffed changes depending upon the experience of the company. It can mean changing the makeup of the team, bringing on new resources, or retraining existing resources. However, that part of the planning is not a focus of the TCO. Instead, it’s important to estimate the consumption of resources at the implementing company and whether they already exist. It will produce inaccurate TCO estimates to simply assume, as many companies do, that all applications within a software category will consume the same maintenance resources because this skews the estimates in favor of applications that are more expensive to maintain.

Adjusting for the Number of Users

Adjusting for the number of users is, of course, extremely significant for any TCO analysis, because the number of users is one of the most important drivers of cost. Applications scale in cost as the number of users increases. Therefore, a TCO that assumes 100 users will be higher with only 10 users—although the costs will not scale in a linear fashion. In fact, other things being held equal, the higher the number of users, the lower the user cost per user. This is a consistent relationship that holds true across all enterprise software categories.

Unfortunately this insight often leads companies to attempt to use applications in more regions and in more divisions than it actually fits in order receive these “cost savings.” That is direct cost savings of a lower cost application—without considering the cost savings or revenue enhancing capabilities of the functionality as matched to the business requirements. However, this is a standard IT focused blind spot that does not consider the functionality of the application. It is perplexingly simplistic, but is also extremely durable. Many vendors price their software per user. If they do not, or if they have a multifactor- pricing model, then the software cost per user can be estimated by taking several estimates at specific numbers of users and then triangulating back to the user estimate that is provided by the implementing company. The cost per user is particularly useful for comparisons within a software category, as the estimated number of users for most applications within a software category will be the same.

However, the per user cost is not helpful for making value comparisons between software categories, because different applications vary quite signifi cantly based upon the type of application. For instance, the categories of software that are most broadly used are ERP systems and reporting/business intelligence systems, while the categories of software that are used most narrowly include specialty applications such as supply chain planning. In fact, the greater problem with a supply chain planning system is that too many people in the company use it and make changes; this is an issue because planning systems are supposed to be limited to a small number of users. Transaction processing systems such as ERP systems create changes (often to single records), and reporting/business intelligence systems simply allow users to view data rather than change data. However, supply chain planning systems allow users to change data and change aggregations of data, even though not too many people in the company should have this power. Therefore, the cost per user will be much higher for supply chain planning systems than for ERP systems. This is not a measurement of the value that these systems provide to the company, or whether a company should buy an application from one software category or another; it is simply the nature of these software categories and how they are designed to be used.

I added a regression formula, which is useful for making other estimates aside from the two data points that I have included above. For instance if a company had forty-two users, it could expect to pay $15,295 per user over a seven-year period, or $2,184 per user per year. This is just one application; different applications have different relationships regarding how their costs per user decline as the number of users increases.

Some articles have covered the cost per ERP user, but neglect to mention that the number of users for ERP systems tends to be high. Analysis that compares the cost per user per vendor without explaining the average number of users for each vendor will result in a misleading conclusion. Selectively releasing TCO statistics like this without showing the full context can easily result in the reader knowing less than before they learned the “statistic.”

Using TCO for the Broadest Decision

However, what should be evident is that making multiple TCO calculations available leads to a variety of broader analyses. The problems with ERP are multifaceted, but two of the biggest issues are limited functionality combined with ERP’s high TCO; added to these issues is how developing a dependency on ERP leads to the purchase of other applications with high TCO and low functionality. For some time the false argument of marijuana being a gateway drug was used to develop a highly punitive law enforcement system for marijuana smokers, including its classification as a Schedule 1 drug. However, a much stronger argument can be made that ERP is a “gateway drug” for companies to purchase other enterprise software with high TCO and low functionality than ever existed for marijuana being a gateway drug to harder drugs. If a company builds a database of TCO calculations for its software selection projects, the company eventually ends up with a comprehensive TCO for categories of enterprise software. The graphic on the following page shows the broad ranging uses of TCO to support specific and broad decision-making.

Conclusion

This chapter attempted to show some creative uses for TCO. One of the most interesting aspects of performing a TCO analysis between a wide number of applications is that not only are there great differences between the application categories (such as between reporting/business intelligence, supply chain planning, etc.), there are also great differences within application categories. Essentially, some applications with very high TCO are competing directly with applications with low TCO. Furthermore, there is not a strong relationship between an application’s TCO and its quality, functionality or capability. What this means is that the enterprise software market is essentially ineffi cient. It also means that software selection is incredibly important because the variability in software value is so great.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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
Categories TCO

How to Use TCO for Better Software Decision Making

Executive Summary

  • Brightwork Research & Analysis creates TCO calculators to help enable better decision making.
  • This is a critical point in how to use TCO estimation.

Introduction

Developing the TCO estimations is the difficult part. The more interesting part is actually using the TCO, as there many varied uses. TCO can be used specifically or generally. For instance, once one has a handle on TCO for an application area, the TCO can be used to make future decisions after the purchase has been made. This is best explained with an example, and one came up while I was writing this book.

Example: TCO and Continuous Improvement

I was developing a proposal for an audit of an application that was already installed and live. This audit was designed to offer areas of improvement in the application. To provide some context, the following text was used on one of the slides from my proposal presentation:

“In software implementation, much of the focus is on the initial acquisition and the implementation. However, the measurement of optimal usage and received benefi ts can be a tricky proposition. To do this requires seeing the application in a variety of environments, and comparing the confi guration and planning the outcomes. The audit provides important feedback toward the software implementation’s current usage and potential areas of improvement.

1. Some functionality may not be working exactly as desired.
2. An unknown feeling as to how much and/or well the investment in the application is being leveraged.
3. Issues with, or concerns that, the application may not be optimally integrated (both technically and process–wise) to the other applications in the company.”

Many companies are interested in such an audit if produced by an objective source. However, the question of the price eventually comes up, and while a consulting rate can be fiddled with, the biggest issue is the duration of the audit project. Previous audits/evaluations I had performed typically ranged from one week to three weeks. However, those who wanted a shorter audit based their logic upon the idea that the cost would be too high, as the audit would cost between $12,832 and $14,560. There was no way that some of the companies that had spent roughly $100,000 for both the software and the implementation (this was inexpensive enterprise software) would be willing to spend what could be close to $15,000 for an audit—or what amounted to fi fteen percent of the total cost of the software and implementation.

Overfocusing on the Software License

However, the problem with this way of thinking is that the cost of the software license and implementation is not the company’s TCO for the life of the application and therefore should not serve as the estimation of its investment. The TCO studies at Brightwork Research & Analysis show that the software and implementation costs for the application in question represented only about thirty percent of the application’s TCO. Other costs included hardware and maintenance. We can estimate the TCO for customers who spent $100,000 for just the software and implementation (consulting), and this is done in the following spreadsheet.

From this analysis, it does not seem as if the company should be so concerned about the audit’s cost. The cost of an audit is not fi fteen percent of the customer’s cost, but would be between 3% and 3.4% of the application’s TCO. This is a far more logical context within which to make a decision about seeking advice about a solution. Of course, this says nothing about the quality of the audit; this TCO analysis simply provides a context within which to perform the cost-benefit analysis.

The Results of an Audit

The audit can provide good results or bad results depending upon the knowledge level and incentives of the individuals performing the audit. After TCO is developed, it can be put to use in supporting decision-making in a variety of ways, as shown in the example above. Companies should really have TCO analyses performed for all of their applications. It is quite common for companies to make decisions to extend use of their ERP system in some area, usually functionality that is known to be mediocre; however, the decision is driven by the desire to “get more value from our ERP system” or to “leverage our ERP investment.” These can seem like desirable goals, until one begins to look through the lens of TCO. When executives state that they want to leverage ERP by utilizing more of that ERP system’s functionality, exactly what is being leveraged should be understood. In fact, the only thing that is being leveraged is the software license fee, possibly some hardware cost and support fee—but not the implementation costs, some of the hardware cost, and not overall maintenance cost.

However, if the hardware cost is taken at a fifty percent value (which either way is a minor portion of the TCO), then the average costs for the license fee, hardware costs, and the support fee across a wide variety of applications come to roughly fifteen percent of the TCO of any new application implementation. And this means not using an application, which would win in a software selection, rather this is simply using the application that happens to be “around.”

Overall, “leveraging” any current software, be it ERP or other software that the company owns, will not typically save the company more than fifteen percent of the TCO of the functionality in that area. Depending upon the situation, there can be more integration costs. However, while the company saves roughly fifteen percent on the TCO of the new functionality/application, making this decision will, in most cases, greatly reduce the ROI of the initiative.

Reducing ROI Through Lowered Functionality

How easy is it to reduce the ROI on a software project by at least fifteen percent? By using software that is not particularly adept in an area compared to competing options, not only is it easy—it is almost assured. According to statistics that are commonly quoted, software implementations have a success rate of roughly fifty percent depending upon how the question in the survey is asked. By our estimates, this is too high, for several good reasons. Some companies that deem the solution to be a success do not know the software area well enough to know how little the application offers over previous approaches to solving the same problem. Off the top of my head I can recall a number of projects where the application does very little to improve on the previous solution, but that truth is hidden from the client by the consulting company or by their own IT department. The business users know, but the executives—who mostly fi ll out the success/failure questionnaires—would not know.

So, trying to save fifteen percent on the cost of the implementation with absolutely no consideration for the potential ROI (which is the dominant approach to software selection and decision making in US companies) is one of many factors that keep the success rate of IT implementations so low, and probably lower than the commonly quoted statistics would lead one to believe. In fact, with IT implementations as risky as they are, the implementing company needs every possible advantage it can get, and trying to save fi fteen percent in what is just one category of costs is not the way to do it. Choosing the best application for the job is the first step in increasing the likelihood of a project’s success.

The End Result of Not Using TCO to Inform Decision Making

Deciding to leverage what is “already purchased” (a misleading term as it should be rephrased as leveraging what is “already fi fteen percent purchased”) will most often mean taking a major hit in functionality and in the ability of the users to perform the activities in the system that the company is asking them to perform. Furthermore, this line of thinking assumes that all other costs—that is the other eighty-five percent of costs—are roughly equivalent. However, they are anything but equivalent. On a direct functionality-to-functionality basis, ERP systems are the most expensive systems to implement and to maintain. This is demonstrated by the TCO studies at Brightwork Research & Analysis. ERP systems are almost always combined with customization, estimates range from 87 to 93% of ERP implementations have from moderate to extensive customization.

This customization lengthens out the implementation timeline, which results in increased implementation costs and higher long-term maintenance costs. This is a primary reason why so many companies have continued to implement uncompetitive functionality in their ERP systems when so many better solutions were available in the marketplace, they are attempting to utilize their pre-existing investment in their ERP system. However, research at our companion site Software Decisions demonstrates that this is a faulty logic as companies can only expect to save 12.5% of the application’s TCO by leveraging the sunk cost of a previously implemented ERP system. Other applications that are specifically designed to meet business requirements (aka best of breed) have better ratings in a variety of compensating criteria. Because of this, it is a simple matter to exceed this cost savings with an increased likelihood of the following:

  1. A Longer Implementation
  2. More Customization Expense
  3. A Higher Risk Implementation
  4. Lower Functionality/Worse Fit of Functionality
  5. Lower Usability
  6. Lower Maintainability

Conclusion

TCO calculations can be used to improve decision making. Making decisions without an honest TCO calculation and estimate is like flying blind. Both consulting companies and software vendors want to their customers to stay as far away from TCO estimation as possible. This allows customers to me moved to the highest TCO solutions which benefit consulting companies and software vendors the most.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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
Categories TCO

How to Understand The ROI Analysis Failure of Outsourcing

Executive Summary

  • Outsourcing often has a negative ROI, which is in part due to its ineffective outcomes.
  • The article explains why the ROI of outsourcing was never performed.

Introduction

When reviewing Brightwork Research & Analysis analyses, software vendors will typically respond that the internal support amount should be lower. Often they only estimate their own support costs, and when they do acknowledge the internal support costs, they will only estimate the internal IT resources required to support their application. While that approach was never accurate, it is even less accurate now because companies are responsible for more “self-support” today than ever before. And this is, in part, due to the IT outsourcing trend. Outsourcing makes CIOs look great from the perspective of costs. However, in the vast majority of cases we have reviewed, outsourced IT support means a reduced IT support level.

Outsourcing Media Coverage

Some journalists will state that the main issue is offshoring—that is outsourcing to low cost countries—but that outsourcing is viable. In fact, if we look at SaaS, this is “outsourcing” much of the IT support for an application—although it is of a different nature as the software vendor has a comparative advantage in their own application and they host and control it. However, as practiced, outsourcing refers to a large consulting company offering resources from countries with very low wages. The consulting company then bills out these resources at a much higher rate than they pay them. This is the predominant method of outsourcing, and this is what I am referring to in this section. There seems to be a great number of apologists for outsourcing in the IT press. All the major consulting companies are advertisers in these outlets, and they will interview their advertisers on various issues to determine the editorial approach they should take. Articles that don’t gel with advertisers don’t get covered. The evidence on the advertising’s impact on media content is very well established, and is from multiple sources.

One of the best known research being the investigation into the coverage of the health issues of tobacco with media outlets that took advertising money from cigarette companies. Those media outlets that took cigarette advertising did not report information on tobacco’s connection to cancer. Advertising’s influence on the media output in enterprise software is covered in the book, Gartner and the Magic Quadrant: A Guide for Buyers, Vendors, Investors.

The Warner Brothers Example

One very well known media company provides a perfect example of how not performing a proper TCO estimation can result in making a poor decision. Warner Brothers made the decision to outsource its IT department back in 2008. Warner Brothers itself did not want to outsource, but was forced to do so by their parent company Time Warner. Leading up to this decision, no studies of any kind were undertaken and certainly no true TCO was performed to inform this decision. Instead estimates, taken from Cap Gemini, were used to justify the change and explain the expected cost savings. Of course Cap Gemini was going to take over part of the outsourced workforce, so they had a powerful bias in proposing that outsourcing would save Time Warner a great deal of money. These cost savings were believed (by Time Warner at least, if not Warner Brothers), and the program
was announced to the media in January of 2009. Eight hundred employees, or ten percent of the Warner Brothers work force at the time, would be outsourced.

“The 800 positions break down as follows: 200 open positions around the world; 300 outsourced (with a third being offered employment opportunities with Cap Gemini and continue to be based in Burbank), and 300 lay-offs.” — Warner Bros. Announces 800 Layoffs

This initiative was, in part, a PR stunt intended to boost the stock price. Warner Brothers had experienced some down quarters, and it needed to do something to increase the stock price. Outsourcing communicated to the financial markets that Warner Brothers was “doing something” to reduce its costs. Information from inside of Warner Brothers indicates that the outsourcing program was a failure, and Warner Brothers has since brought many of these jobs back in-house because the quality of the IT support that was received was so poor. However, Warner Brothers did not make this announcement because it had no PR value. Wall Street wants to hear about outsourcing stories—not insourcing. Warner Brothers would in effect be admitting that their program had failed. And Wall Street analysts—who know less than nothing about running a business and do not consider the effect of the quality of IT support on the operations of a business—merely view various announcements through a conformist lens: outsourcing good, insourcing bad.

The Effect on the Stock Price

Analysts would have penalized Warner Brothers because after all, “insourcing simply increases costs.” Again, all information that is released must have a positive impact on the stock price because to a large extent the executives are compensated in stock. In fact, responsiveness to the financial markets is a big reason why initiatives are taken, and has very little to do with improving the condition of the company. In part, companies implement systems like ERP and initiatives like outsourcing not because there is any evidence that they benefit the company, but because the company needs to demonstrate to outsiders that they are doing “all the right things.” The financial analysts who evaluate stocks have no experience with ERP and have never participated in IT outsourcing, so they do not know whether these things have any inherent value either way—but they do know what is trendy and topical. These “right things” change depending upon what happens to be trendy at the time.

When I discussed this book with a colleague, who is quite experienced in these matters, he questioned whether a service to provide TCO analysis would have a market. He stated:

“Who would be the market? It’s not the consulting companies, because any company that offered honest TCO evaluation services would be their enemy. It’s also not the purchasing companies, because this type of information would interfere with their stock options and their ability to get rich.”

Conclusion

Applications are utilized at a lower level and problems take longer to fix. The major consulting companies produce most articles on this topic; as they have significant outsourcing businesses themselves, the information they provide is unreliable. Furthermore, none of the major consulting companies have demonstrated that they are competent at performing IT support versus selling IT support. At client after client I have worked with the outsourced support is mismanaged and the business unhappy with the support that they receive. Essentially outsourcing has made IT less efficient and while outsourcing may have resulted in fewer IT resources within companies, it has also meant negative externalities in the form of lower support that must be performed by the business. Therefore, the lowered costs (although at very high margins with little money paid to the workers providing the support—mostly in India) have not been able to maintain quality levels. It is possible to imagine high-quality outsourcing, but while that may exist hypothetically, the reality of outsourcing is a movement to reducing costs while ignoring reduced quality. Therefore, the total cost of supporting applications is far greater than simply the costs of IT resources assigned to support the application.

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
Categories TCO

The Brightwork Research & Analysis TCO Methodology

Executive Summary

  • Brightwork Research & Analysis uses a comprehensive TCO method.
  • How our method is different from most TCO methods.

Introduction

The term “methodology” comes from the Latin word methodologia, which is a combination of methodus (a mode of proceeding, a way of teaching, or a road) and logia or logy (the study of). Therefore, a methodology is the study of a mode of proceeding. A methodology is not a method, and a great many people who prefer to use a more sophisticated word rather than the accurate word confuses these terms. For instance, in supply chain planning, optimization is a “method”; it is not a methodology. A study of the methods employed in supply planning would be a methodology. A methodology is a “design process for carrying out research or the development of a procedure and is not in itself an instrument for doing those things.” One of the criticisms from Alan MacCormak’s 2003 study is that many TCO studies simply include too few cost categories, as he explains in the quotation below: “The main area in which studies differ is with respect to the number and type of costs that are included in a TCO calculation.

At one end of the spectrum are studies that consider only one or two ‘direct’ costs, focusing mainly on the up-front cost of the particular software platform that is being evaluated. At the other end are studies that use a much more sophisticated assessment, capturing not only the direct costs involved in purchasing and maintaining and supporting a particular platform, but also the ‘indirect’ costs associated with the use of the system, such as the cost of downtime. Importantly, the more comprehensive studies typically find that the cost of purchasing or leasing the software represents only a small proportion of the TCO for a software platform. This illustrates the danger of relying on studies that use only partial data on cost as the basis for making IT investment decisions…

It is interesting to note that evaluations of TCO are not always conducted in a consistent manner even within the same firm.”

TCO Components

TCO, or Total Cost of Ownership, is the overall output of the process, and simply sums the costs of the four main TCO categories:

  1. Software Costs: Software associated costs, such as the cost to purchase licenses, or for SaaS delivered software their monthly/yearly charge.
  2. Hardware Costs: Cost for hardware on which the software is installed.
  3. Implementation Costs: Consulting resources, consulting travel, training.
  4. Maintenance Costs: Fully loaded internal resources and vendor support.

The TCO Cost Categories

What follows is all of the individual cost categories that make up the final TCO. Software/License Costs The license cost is the initial purchase price from the vendor for an on-premises delivered solution, or the ongoing monthly or yearly software cost if the software is purchased as a SaaS-delivered application, often called a subscription. Here it is important to estimate the costs for the equivalent product between the different vendors. For instance, at the time of this book’s publishing, the software vendor Salesforce offers five different pricing levels, ranging from $5 per month per user all the way up to $250 per month per user. These pricing levels represent very different applications, even though they are all “Salesforce.” It is important that the software license costs used from each vendor are consistent across the vendors that are compared. For example, the business requirements must be matched against each application to fi nd the appropriate application expense level.

Secondly, other vendors do not simply charge for their software either at different levels of use or by the number of users, but through a combination of both. For instance, one of the software vendors analyzed at Brightwork Research & Analysis has two different user types, as well as add-on modules. Therefore, the yearly license/subscription cost is a combination of these two types of users, along with the specific functionality to be activated. If a customer does not need multi-currency or project accounting, then the customer does not pay for it. This is another advantage of SaaS software vendors: they can price their application for just what the customer needs because they are able to control the functionality used by the customer.

Hardware Costs

Hardware itself is a small component of the overall cost of enterprise software. This was not always the case. In fact, at one time computer hardware was so expensive it was not bought outright but rather was leased. But the phenomenal improvement in computing technology in the last four decades has reduced the costs and increased hardware performance to a stark degree. In the book, Inventory Optimization and Multi Echelon Planning, the graphic on the following page was used to show this improvement:

This graphic was cut off in 1986 because to continue the growth in speed until the present day would make the early increases imperceptible. However, the hardware contribution to TCO cannot be restricted to the costs of the actual hardware. Other costs relevant for hardware include support: the cost of IT professionals to keep the hardware running, upgrading the hardware, fixing it, etc. Many individuals who specialize in hardware cost estimation use a factor of twenty percent to estimate the ongoing maintenance costs of hardware. However, the problem with this rule of thumb is that the maintenance costs for hardware are not proportional to the costs of the hardware.

Hardware and Consumption

When more hardware than is strictly necessary for the predicted consumption of the application is purchased, this is called oversizing. When too little hardware has been purchased, this is referred to as undersizing. For instance, hardware that is oversized, and more expensive versus the need often requires less care and feeding than hardware that is undersized. Oversized hardware does not run into the constant limitations that under sizing requires. This entire topic is tricky because it intersects with the methods used in the software, the configuration of that software, as well as the timings of other related systems. For instance, while working with a previous client, I was shocked to fi nd that the frequent problems we had experienced with processing time was because we were running the software on a virtual server. This means that the hardware was not dedicated to the software. Sometimes, when other applications were doing intensive processing, our processing times would be long because there was less of the processor to be allocated to our application.

Undersized Hardware

Undersized hardware not only increases the maintenance costs, but increases the software costs as well, as successive adjustments are made to things like processing times and batch schedules to make up for hardware limitations. And these two costs far exceed the costs of adding more hardware. The expense hierarchy basically is the following from highest to lowest.

  1. Costs Incurred Through Software Adjustments
  2. Costs Incurred Through Hardware Maintenance
  3. Costs Incurred Through Adding Hardware

The process of sizing is the determination of the size of hardware, which must be purchased. It is quite common for companies to attempt to spend too much time sizing, and being concerned with making adjustments that reduce the size of the hardware and the money spent on hardware that end up costing more money in other ways. I have seen companies literally spend more money in performing hardware sizing than my client spent on the cost of the software itself. Spending a disproportionate amount on hardware sizing is easy to do if consultants are used to perform the hardware sizing (as their billing rate adds up quickly) or if the consultants’ work is delayed because they are awaiting a decision on the hardware before they can move forward. Today, and likely in the future, the easiest answer to managing hardware limitations is to “throw hardware” at the problem. When I discuss the types of errors made by IT, I am not talking about inexperienced IT departments from small companies. I am talking about IT departments with a lot of experience from the largest companies, and I am actually quite surprised by how few real hardware experts exist in IT departments who can size hardware across a variety of applications.

Learning Curves for New Applications

One of the major issues is that IT departments are not experts in each application, and so there is a learning curve for each new application. As a result, software vendors are in the best position to perform hardware sizing as they have the greatest number of data points and, of course, developed the software. When SaaS software becomes more prevalent, one of the great benefits will be to take IT departments out of the business of buying and maintaining hardware. For instance, best-of-breed vendors such as Arena Solutions and Birst follow a multi-tenant model, where customers share one application but each customer uses a division of the database. The application is the same, but the data is not mixed up between the customers. Under the SaaS delivery model, hardware is far better utilized, as is explained by a quotation from the business intelligence software vendor Birst.

“This extremely variable computing load requires provisioning of greater computing power and generally results in lower hardware use than in conventional computing systems. It is not uncommon to have CPU and disk use at 1–4% in order to handle infrequent peaks of 60–80%. These low use levels result in particularly expensive hardware requirements. Cloud-based hardware virtualization does not address this as these systems must remain on and using CPU at all times, as user load is unpredictable. This is compounded if any degree of service level is required. To maintain uptime service levels, redundant hardware must be made available for clustering and failover, often doubling hardware infrastructure costs.”

SaaS Software Delivery and Scalability

SaaS software delivery has proven to be the most scalable and lowest cost approach to managing both hardware and software. Therefore, not only are software vendors in the best position to perform sizing, but under the SaaS and multi-tenant model, the vendor gets to spread its hardware over a large number of customers, meaning the hardware is more effi ciently utilized. For instance, when Arena Solutions or Birst are asked to host a new customer, they are able to spread their hardware over many customers. Software and hardware update decisions will become invisible to the purchasing company, and it will be the job of the SaaS software vendor to simply maintain the performance outlined in the service level agreement with their customer.

Implementation Costs

Direct Estimation of Implementation Costs

Implementation costs are segmented into external costs and internal costs.

  1. External implementation costs are the costs of consulting, which can come from the software vendor or from a consulting company.
  2. Internal implementation costs are the costs that the company incurs during the implementation from using its internal resources. These are primarily the IT and business resources departments that are assigned to the project.

Both external and internal implementation costs can be determined several ways. Calculating various implementation durations along with the allocation percentage and the cost of each resource (the billable rate for external resources and the fully loaded costs for the internal resources) is the most accurate method of determining implementation cost when one has first-hand experience implementing the software in question. However, as no one person has implemented all the software for which a TCO would be desired, it is necessary on many occasions to use multiple estimates. The most common multiple estimation is based upon the license cost. Therefore, if the cost of the software is $1,000,000 and the consulting to license cost multiple is two, the estimated consulting cost would be $2,000,000. Implementation multiples generally range from one to four. Some applications that are not implemented by large consulting companies from efficient software vendor’s actually have a multiple that is less than one; however, true on-premises enterprise software will have a multiple higher than one. The only way to lower the multiple is to use SaaS solutions. At Brightwork Research & Analysis, the various TCO estimations—when they are multiple based rather than estimated from “the bottom up” change depending upon the application and the software vendor. Multiple estimations from software vendors cannot be simply accepted, but must be blended with experience in implementation. Many software vendors quote a 1:1 ratio between software costs and consulting costs. However, this is not the extent of implementation costs. Software vendors only consider their consulting costs (although sometimes they add in training) and do not include internal resource costs for the implementing company. Generally, consultants from the software vendor provide the best consulting value. As soon as an outside consulting company is involved, the costs of the implementation go up. A major reason why SAP and Oracle implementations are so expensive compared to other implementations is these applications are typically implemented by the major consulting companies that have the highest implementation costs. As soon as a major consulting company is involved in the project, costs dramatically increase. The quid pro quo is very simple. The consulting company tells the software vendor

“We will recommend you, but only if you give us nearly all of the consulting business—if you don’t do this we will not recommend you.”

Where the Billings Go

The consulting billings partially go to the consultants, but much of it is simply going to the management—that have very little to do with implementing the software. A partner at a large consulting company, out of the IT practice will make roughly $500,000 per year without ever touching the application being implemented. In addition to the partner’s compensation, the major consulting companies also have large overhead in the form of offices (these often have to be prestigious in order to impress visiting clients), marketing (advertising and attending conferences), expense accounts, etc. Again, none of these things have anything to do with project work. At the end of the day, we estimate that roughly 1/3 of the billing rate, which is paid to the major consulting companies, actually goes to project work. But before we close the book on this topic, it’s important to consider that the value is actually far worse than this. Aside from higher billing rates, major consulting companies tend to steer clients to the most expensive applications, and they also stretch out the length of the implementations, which of course greatly increases costs. Therefore the implementation costs are entirely different if a major consulting company is involved. Therefore, to account for all of this, Brightwork Research & Analysis uses higher multiples if a client states that they are using a major consulting company, and companies performing TCO analysis themselves should do the same. In the following paragraphs, we will review how to estimate implementation costs. This method is based on detailed fi rst-hand knowledge.

External Implementation Costs

Sometimes implementation costs are best determined by using the following formula:

(Hourly Rate per Implementation Consultant × The Percent of Time Assigned to the Project × The Implementation Duration) + Travel Costs Module Implementation

Consultant This is the hourly rate for the module implementation consultant, who is the more junior resource on the project from the consulting company or from the vendor. The cost of this resource is calculated with the following formula:

(Hourly Rate × Percentage of Time on the Project) × Average of (Implementation Duration Low, Implementation Duration High) × 4.3 (weeks per year) × 40 (hrs)20 Senior Module Implementation Consultant

This is the hourly rate for the more senior module implementation consultant, who is the more senior resource on the project from the consulting company or from the vendor. The cost of this resource is calculated using the following formula:

(Hourly Rate × Percentage of Time on the Project) × Average of (Implementation Duration Low, Implementation Duration High) × 4.3 (weeks per year) × 40 (hrs) Senior Manager/Partner

This is the hourly rate for the more senior manager/partner, who is the most senior resource on the project from the consulting company or from the vendor. This resource will deal with project management issues, perform account management, acquire resources as needed, etc. These are not full-time resources, but tend to manage multiple projects (if they are from the vendor) or manage the overall program (of which the module being calculated here is just one part). There is a separate line item for the percentage that each of these resources is on the project. Changing either the hourly rate or the percentage of time they are on the project adjusts the consulting costs. I won’t list the explanations for the durations of each of the consulting line items, as they should be self-explanatory. The cost of this resource is calculated with the following formula:

(Hourly Rate × Percentage of Time on the Project) × Average of (Implementation Duration Low, Implementation Duration High) × 4.3 (weeks per month) × 40 (hrs) Travel Cost Assumption

This is for a project in the US. A project in Manhattan or San Francisco would be more expensive, and a project in Omaha, Nebraska would be less. Local resources, if a company can get them, would cost less—but of course it is not likely that the company would fi nd local resources, and most often the local resources are not the best resources for the project. The travel cost is estimated at $45 per hour, and is then multiplied by the number of hours that the consultants are predicted to be on the project. This per hour estimate can be adjusted per the project’s location. I developed the following expense estimate spreadsheet for a project in Seattle, for which I bid an all-inclusive rate (that is, I would pick up my expenses). Because I sometimes stay over weekends, I want to include both my cost of staying and the cost if I fly in and out of the city.

As you can see, the estimates for staying over or flying out are about the same—just a few dollars more per hour for fl ying out. But, of course, the cost depends upon how far the fl ight is and how far in advance the flight is booked. Furthermore, the effi ciency and on-site time of the consultant is lower if they fly in, as they do not appear at the client site until late Monday morning and have to leave by Friday (in some cases Thursday) in the early afternoon to catch their flight.

Internal Implementation Costs

The next area to estimate is the internal implementation costs.

Total Client Resource Costs for the Implementation

This is the total cost of staffing the client resources for the project. The formula we use for the total client resource costs is as follows:

The Total Client Resource Costs = (Implementation Duration in Weeks × The Opportunity Cost Per Week) × The Percent of the Average Week the Employee is assigned to the Project

The formula makes the following assumptions:

  • The Implementation Duration in Weeks = (Average of the Duration in Months × 4.3)
  • The Opportunity Cost Per Week = (The Number of Employees on the Project × The Hours Per Week × The Number of Weeks × The Fully Loaded
    Hourly Rate the Employee Costs the Company)
  • The Percent of the Average Week the Employee is Assigned to the Project

The Percent Each Resource is Assigned to the Project

Most often, client resources assign part of their time to the project while retaining most of their other duties. The greater the number of applications included in the implementation, the more likely it is that internal resources will be one hundred percent allocated to the project. However, we are calculating the TCO for the implementation of one application only.

Implementation Duration

Implementation duration is measured from the beginning to the end of the implementation. The duration of a project cannot be predicted reliably to the month. Companies that attempt to meet deadlines that were predicted before the start of the project often end up with faux go-lives where the software is not really ready and they must continue to work intensively after the go-live date. There are many factors that must be taken into consideration when estimating the implementation duration. Different clients have different levels of complexity and are in different areas of the application’s functionality. Some clients may leverage older and more proven functionality, while others may choose to activate newer and less proven functionality. Some companies choose consulting companies that don’t know the software very well, or can’t document the solution.

We cover this topic in more detail in the article How to Estimate The Duration of Consulting for Software TCO.

The Cost Implications of Implementation Duration

Implementation duration affects TCO in several important ways. The longer the project’s duration, the more the expenses of the implementation add up because
the consultants are on the project longer, and the longer it is until the company can begin seeing a payback from its efforts (however, this is an ROI issue not a TCO issue).

Multiple-Based Estimation of Implementation Costs

The second way of estimating implementation costs is by using a multiple of the software/subscription cost. It’s an easy way of estimating the implementation costs because the external or internal costs are not estimated separately. However, which multiple is chosen is, of course, of primary importance. If this information is not determined from projects, it must be triangulated from multiple independent sources, and of course, fi nding independent sources that will share this type of information is tricky. Brightwork Research & Analysis conducts interviews with a number of individuals with expertise, but people generally do not like going on the record when they report their implementation experiences.

How Various TCO Implementation Estimates Versus Brightwork Research & Analysis Estimates

In one example, the study What Managers Should Know About ERP/ERP II estimates ERP software license costs to be between ten and twenty percent of the overall TCO. That is significantly higher than the estimates at Brightwork Research & Analysiss for ERP software, which show that the average cost across multiple software categories is approximately ten percent. We think this is because our TCO model is more comprehensive, and therefore, we have a higher “TCO” than the “TCO” produced by other entities. The book, Control Your ERP Destiny: Reduce Project Costs, Mitigate Risks, and Design Better Business Solutions considers a reasonable estimate of the ERP software costs to be twenty percent of the total project budget, but states that software vendors tell their potential customers (as do consulting companies) that consulting costs will be roughly twice the cost of the software. However, these are only the external implementation costs and not the internal implementation costs. It seems strange that so many sources limit implementation costs to the consulting costs, when it is well recognized that internal team members must always be assigned to enterprise software implementation projects for some percentage of their weekly hours.

Sometimes internal resources are pulled off their normal duties entirely and one hundred percent of their time is assigned to the implementation project—this is very common on ERP implementations. However, on many other types of enterprise software implementations, internal resources share duties. One independent source, 180systems, actually estimates that consulting costs average sixty-five percent of the license costs (seventy-one percent for larger customers and fi fty-nine percent for mid-sized customers). A meta-analysis and comparison of my individual TCO analyses is provided below.

The software vendors’ estimate of consulting costs being roughly twice the software cost holds true for my sample (although you can see also that there is considerable variability). However, this does not correlate with our estimations because other TCO estimations that we have reviewed consistently underestimate the TCO of applications. License costs are explicit costs and therefore the easiest to estimate, but they are also the easiest to overestimate in relation to other costs. One source that does check out is E2BEnterprise. They provide an estimate, which is consistent with the independent estimation produced by Brightwork Research & Analysis. E2BEnterprise recommends a ratio of anywhere from 1:3 to 1:4 between software and consulting costs for ERP implementations. According to James Mallory of E2BEnterprise, SMB ERP implementations can be as low as 1:1 or 1:2 but only to implement the bare minimum core system. This is common for companies that have a short window for implementation or tight budgets. But costs for a streamlined implementation provide for streamlined capabilities. Companies must continue to implement new modules and other areas of the system in order to gain significant efficiencies and the end result for a proper implementation will result in a total investment closer to 1:3 or 1:4 in the end—it just depends on when you make that investment—up-front or over the course of several years. Here are some important aspects to consider when evaluating TCO studies:

  1. The implementation expenditures for some software categories (for instance, ERP implementation projects) are consistently and signifi cantly overbudget; however, ERP software vendors simply do not include going over-budget in their TCO estimates or, of course, in their project timelines. If the project goes over-budget, no estimate provided by a software vendor applies.
  2. What is the TCO for software that is never implemented or severely delayed? This is a confusing question to answer. I have interviewed for several projects that were re-implementations, and have worked on a few. A re-implementation may occur if the software failed to go live—that failure may have taken place over the course of a year and a half. The company focuses on other things, and then two and a half years after it began the fi rst implementation, decides to re-implement the software. If the software is taken live the second time, this project will most likely have a negative ROI. No software vendor or implementing company wants to talk about these types of projects, but the historical (not hypothetical) implementation timelines must be incorporated into future projections. Anything less than this and the TCO calculation is being fudged to meet a predetermined outcome. If, depending upon the study used, between fifty percent (Barker and Frolick) and ninety percent (Scott and Vessey) of ERP implementations fail, and if the vast majority of ERP implementations miss their deadlines by signifi cant durations, why are TCO estimates still based upon assumptions that do not include these very critical factors?
  3. Depending upon the study used, between eighty-seven percent and ninety-six percent of ERP implementations include moderate to extensive customizations. Customization results in high implementation costs, high continuous improvement costs, and high maintenance costs. Other software categories have various degrees of customization—almost always less than ERP—so ERP should receive the highest bump for coding-related implementation costs.

Training Costs

Training costs fall into several categories. Most software vendors either send the training out to the implementing company (if there is a suffi cient number of company resources in the class), or the implementing company sends its resources to the software vendor’s training facility. But this is not the end of the training costs. The salary costs of the people being trained must be included, as these people are not able to do their regular work during the training. The formula that we use for this standard training model is the following.

Total Training Costs = The Training Cost Per Week + The Opportunity Cost Per Week

  • The Training Cost Per Week = (Number of Employees Sent to Training × Vendor Charge Per Employee Per Week × The Number of Weeks)
  • The Opportunity Cost Per Week = (The Number of Employees Sent to Training × The Hours Per Week × The Number of Weeks × The Fully

Loaded Hourly Rate the Employee Costs the Company)

Not all resources from the implementing company spend the same amount of time in training. Some resources are assigned to become resources, which mean they take on some of the internal training and long-term support for the application. These “super user” resources must be estimated at a higher level than normal users.

Integration Costs

Integration costs are simply included in the overall implementation costs because breaking out the integration effort is unnecessarily complicated—it is far simpler to estimate the overall implementation costs. Furthermore, many companies— SAP and Oracle come to mind—lead executives to believe that they will incur minimal integration overhead if they purchase one of their non-ERP applications to connect to the implementing company’s ERP applications; this is untrue. All of SAP and Oracle’s applications sit on different hardware, and while they may have adapters, they are not actually integrated—they have different databases. (The term “integrated” is used colloquially to mean any connected systems, but most accurately it means that the systems use the same database. When systems have adapters between them, they are not technically integrated.) Often the quality and ease-of-use of these adapters is inferior to the adapters that are written to connect best-of-breed applications to the ERP system.

Maintenance Costs

Maintenance costs are the costs of keeping the application up and running after the go-live, and are some of the most underestimated enterprise software costs. These costs are comprised of both the yearly support fee as well as the internal labor costs of providing support.

Internal Maintenance Costs

Internal maintenance costs represent the allocation of internal resources to maintaining the application for its lifetime in the company, and are calculated with the following formula.

Internal Maintenance Cost = The Fully Loaded Resource Cost Per Year × The Average Allocation of Time to Support the Application × The Number of Years the Application is Used

The number of years an application is used is an estimate based upon the software category. Different software categories have different average durations of use in
companies. This is addressed shortly.

Vendor Yearly Support Costs

The vendor’s yearly support costs change depending upon whether the software is delivered as on-premises or SaaS. Support fees tended to be lower in the past, but as software vendors learned that companies overemphasize their software purchase price versus other costs and have no idea how to perform TCO estimations, the vendors reduced the up-front costs and have increased their support costs. For example, vendors have reduced their initial license fee and increased their support fees. Large ERP vendors have set twenty percent as the standard service fee, but depending upon the vendor, a reduced rate can sometimes be negotiated for this service fee. With SaaS-delivered applications, the service fee is bundled into the yearly subscription so there is no separate fee to calculate. Overall, this is one of the easier numbers to obtain from software vendors.

Total Years the Application Is Used By the Company

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. We cover this in more detail in the article How to Estimate The Duration of Use for Software TCO.

Internal Support Costs and Outsourcing

When reviewing Brightwork Research & Analysis TCO analyses, software vendors will typically respond that the internal support amount should be lower. Often they only estimate their own support costs, and when they do acknowledge the internal support costs, they will only estimate the internal IT resources required to support their application. While that approach was never accurate, it is even less accurate now because companies are responsible for more “self-support” today than ever before. And this is, in part, due to the IT outsourcing trend. Outsourcing makes CIOs look great from the perspective of costs. However, in the vast majority of cases we have reviewed, outsourced IT support means a reduced IT support level. Applications are utilized at a lower level and problems take longer to fix. The major consulting companies produce most articles on this topic; as they have significant outsourcing businesses themselves, the information they provide is unreliable.

Furthermore, none of the major consulting companies have demonstrated that they are competent at performing IT support versus selling IT support. At client after client I have worked with the outsourced support is mismanaged and the business unhappy with the support that they receive.25 Essentially outsourcing has made IT less effi cient and while outsourcing may have resulted in fewer IT resources within companies, it has also meant negative externalities in the form of lower support that must be performed by the business. Therefore, the lowered costs (although at very high margins with little money paid to the workers providing the support—mostly in India) have not been able to maintain quality levels. It is possible to imagine high-quality outsourcing, but while that may exist hypothetically, the reality of outsourcing is a movement to reducing costs while ignoring reduced quality. Therefore, the total cost of supporting applications is far greater than simply the costs of IT resources assigned to support the application.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

http://www.forrester.com/TCO+Is+Overrated/fulltext/-/E-RES44545?docid=44545

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
Categories TCO

How to Estimate The Duration of Consulting for Software TCO

Executive Summary

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

Introduction

Of all the many factors that go into the implementation duration, the most important is the quality of the application itself, and specifi cally its implementability. At SCM Focus we assign an implement-ability score to every application that we review. This is important, because so many companies simply assume— implicitly—that all software applications included in the software selection exercise are equally implementable. They don’t differentiate based upon this factor. However, this is a false assumption. Some software is designed to be sold more than it is designed to be implemented. One of the best examples of this is SAP. At SAP, Sales has most of the say in the organization, and that the application “has” functionality is emphasized rather than making the functionality implementable. Therefore, SAP projects typically have many problems and take a long time to implement—and continue to have more problems after implementation.

How Configuration Ease Fits into Implementation Duration

The best of breed applications that we compare to SAP are much easier to configure. More of the functionality works and the users find the application interface easier to use, so the implementation time is shorter. Companies that are unhappy with how long their implementations are taking, need to look at the software they are selecting because the application is the greatest determinant to both the project duration and the success of the implementation. We are really starting to see this happen in the business intelligence market, where the overwhelming cost and implementation time of self service applications like Tableau are making the TCO advantage almost too obvious to ignore versus older solutions in the market.

Realistic Project Implementation Duration

Estimates Most vendors would not be happy with the implementation duration estimates developed by Brightwork Research & Analysis. However, these estimates are based upon years of analyzing how applications are actually implemented, which is far from the optimum values that are often quoted. We have performed the research, and the statistics are clearly on our side—enterprise software implementations take much longer than is generally assumed, not only by the software vendor, but also by the project management of the implementing company. There have been many attempts over the years to reduce implementation timelines, yet they remain sticky. One exception to this is SaaS, which consistently has shorter implementation durations than on-premises applications. SaaS delivered applications allow a company to get closer to the optimum implementation time.

One reason for this is there are fewer hiccups and the infrastructure is already in place. In addition, more of the vendor’s expertise can be leveraged at any time (the SaaS vendor has one hundred percent access to the application at any time because they control the box)—and that can mean literally any time; some SaaS vendors offer twenty-four hour support and since so many SaaS vendors offer some support from countries on opposite time zones—notably India—work can be done when clients are asleep in the US or Europe. These are just a few factors that explain why SaaS implementations tend to be so much faster and smoother than implementations of on-premises applications. But most applications are not delivered through SaaS; they are delivered on-premises, and realistic implementation times are necessary because we are not developing TCO estimates for a perfect world, but for companies that have to implement software in this world. Nucleus Research addresses this exact issue with other similar applications like i2 Technologies.

“Nearly 70 percent of the i2 deployments lasted longer than project teams had planned. For these companies, deployment took, on average, nearly three times longer than expected while increasing consulting personnel costs and slowing the realization of benefi ts from the solution. “Don’t let vendors dictate your expectations of how long it will take to deploy a certain tool in your environment. Make an independent estimation based on internal planning and the experiences of similar companies that have implemented (the application).”

Including Problematic Impementations as Part of Durations

Another factor that can lessen an application’s overall implementation duration is that often people will not consider the durations of problematic implementations, as if for some reason problematic implementations don’t count. It is unscientifi c to remove problematic implementations from the equation unless there is a very good reason to do so (such as the company stopping the implementation to work on a different project before returning to the implementation of the fi rst application). This is called “outlier removal,” and is a primary method by which research is falsified across disciplines, as discussed in the following article.

I was recently contacted about a re-implementation project. For two years the company had attempted to implement a combination of SAP modules and never brought the system to a live state. It then waited a year and a half, and then attempted a re-implementation. What is the duration on this project? There are other examples of problems in time estimation. Often an application will go live, but the company fi nds the application is not adding value to the business. I have seen this numerous times with applications where the confi guration and settings were not set up in such a way that the business could benefi t. Instead of adjusting the settings, which would have been the right thing to do, the faulty configuration was simply rolled out to more regions in order to keep on target with the initial timelines. A person in management may measure the time the application officially went live as its implementation time; however, the way this is measured at Brightwork Research & Analysis is that the application should not be counted as live until it begins to add value to the business. It is, in fact, quite easy to bring up an application so that it is “live.” All that has to be done is client specific master data setup, integration performed to other systems and a generic confi guration used. I refer to this as a 100% IT implementation—the system is working and all the server lights are blinking.

Conclusion

Implementing the software in a way that adds significant value is the actual goal not simply hitting a deadline. However, in multiple studies it has been found that companies have no other way of objectively determining project success beyond the meeting of project deadlines.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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
Categories TCO

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

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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
Categories TCO

How to Understand The Multi Billion Dollar TCO Analysis Failure of ERP

Executive Summary

  • ERP systems have a negative ROI, which is in part due to their high TCO.
  • The article explaines why the TCO for ERP systems were never performed.

Introduction

In the field of enterprise software, one of the most amazing stories of the past several decades is the mass purchasing of ERP systems—purchases made without the customers searching for evidence that ERP systems are good investments. If they had looked, they would have found that the logic presented to sell ERP systems had no evidence to support it. In the early phase of ERP’s adoption, the excuse could have been made that the systems were new and studies had not yet been performed. However, thirty years after ERP systems were first adopted, that excuse no longer holds any water. This story is explained in detail in the book, The Real Story Behind ERP: Separating Fact from Fiction. The adoption of ERP systems by so many companies occurred with very little actual research on the part of the parties involved either in making the purchases or in recommending the systems.

The vast majority of ERP purchases were made without TCO calculations performed, which is why I dedicated a chapter of this book to ERP—it is such an amazing example of what happens when decisions are made without the necessary research—and instead of research large groups of individuals simply buy what other companies are buying—all the while assuming “someone else must have checked.” This short chapter will illuminate what happens when purchasing decisions are made without suffi cient research. These long-lived mistakes with respect to ERP have affected every part of IT today. ERP systems turned out to be vastly more expensive that even the highest “generalized” cost estimates of purchasing companies, even though eighty percent of the time these companies performed no real estimation. Now the ERP systems consume a very substantial portion of the overall IT budget, particularly for companies that purchased from the most expensive “big ERP” vendors. Other applications have been crowded out, and almost any of these other applications would have a higher ROI than ERP.

Did Logic and Analysis or Trendiness Drive ERP Procurement Decisions?

ERP was sold to companies on the basis of a number of arguments, which are outlined in the SCM Focus Press book, The Real Story Behind ERP: Separating Fact from Fiction, and then analyzed. However, it must also be recognized that many ERP purchasing decisions were made because companies felt they simply needed to have ERP, and these decisions were driven by fear—such as the Y2K fear that drove so many ERP implementations—or by a herd mentality.

“Slater (1999) discusses the breadth of such problems as he notes that ‘companies buy multi-million-dollar software packages only to find out they don’t work—or at least they don’t work well—for one of their key business processes.’ The reason, Slater suggests, is that ERP software is so hot, the flames fanned by consultants and the technical press cause companies to simply push forward without dealing with such key restrictions.” — Technology Monoculture

Measuring Success?

Another reason that success is often overestimated is that companies do not even know the applications well enough to know that they have failed. That is, they
cannot properly measure the output of their system. While the users may know the system does not work as desired, the executive decision makers often do not. In my own field, I have written a number of articles that explain that often some of the most advanced software available is confi gured incorrectly to such a degree that there was no point in implementing the sophisticated software that was chosen.

When I have brought the topic up of analyzing the actual quality of the system output with several of my clients, I have sometimes been told that no time was allocated to fi x the system and that we must “hit the deadlines,” which is loosely translated into rolling out the fl awed confi guration to new regions. The information I provide is often suppressed and never reaches the ultimate decision makers. I have also been asked to suppress what I know about the problems with the confi guration and to make it sound as if the application were correctly configured when discussing it with the users. Therefore, the top decision makers are in effect insulated from accurate information about how systems perform and instead told that everything is on track. Furthermore, information is not only suppressed by consulting companies (which, of course, is incredibly common), frequently, the company’s own IT department withholds information from their own business, which explains the fact that even IT and the business cannot agree on striving for an effective software solution because of the differing incentives between IT and the business. So, when analyzing how and why companies do not perform TCO, the fi rst assumption to dispense with is that those companies have rational decision processes or have effective channels for transmitting information to decision makers. I could speak at length on this topic and have many articles that explain this in a multitude of different areas. However, to those with work experience, I suspect that this is not exactly new news, so I will fi nish with this topic here.

The High TCO of ERP

ERP systems sold on the benefi ts of lower costs have actually proven to be very expensive, not only to implement but also to maintain. ERP systems have continued
to become more expensive in terms of their direct cost because when companies give so many modules over to one vendor, they also give up a lot of negotiating
leverage. The ERP vendors use this leverage in several ways. One way is to sell uncompetitive software in other areas in the same account. From a marketing perspective, ERP sales are the “wedge” that gets the company into the account. Once the wedge is in place, ERP is in the catbird seat in terms of selling more
software into the account.

A second way ERP vendors use this leverage is to increase the cost of the yearly support contract. Generally the TCO of on-premises ERP systems is considered
to be high. The implementation time is the longest of any enterprise software category. And the term “implementation time” is laden with assumptions. For instance, according to IDC, fifteen percent of survey respondents re-implemented their ERP software. What was the implementation time on those projects, one may wonder. However, finding detailed TCO studies on ERP systems is not easy. For this reason, at Software Decisions, we created TCO estimates for all of the major ERP applications, and several of the open source ERP applications.

The High Opportunity Cost of ERP

An area of ERP that is underemphasized or simply ignored altogether is the opportunity costs of ERP. The term “opportunity cost” is not used all that frequently on IT projects, so let’s defi ne the term fi rst before we explain how it can best be leveraged in decision making:

“In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the ‘cost’ incurred by not enjoying the benefit that would be had by taking the second best choice available.” — Wikipedia

Costs are often described in general parlance as the amount that we pay for things. However, economists look at costs quite a bit differently. Promoters of ERP tend to present any benefi ts of ERP without acknowledging that the time and effort spent on the ERP project could have gone into other initiatives. The comparison should be between the gains from those systems versus the gains from ERP systems. Let’s take a simple example. Let’s imagine that I have no car. I have a hard time getting around town because I lack transportation. In order to improve my condition, I buy a tractor. After a week, I report that I am able to get around town much more effi ciently, and compared to walking, am now much more mobile. With this background, have I established that the tractor was the best possible alternative? Obviously I have not proved this. I could have purchased any number of cars, almost any of them with lower operating costs than a tractor. Tractors are great, but not a good choice for the purpose of traveling around town. Therefore, the question is not whether a tractor can improve mobility more than no other alternative device, but whether the purchase of the tractor improved my condition compared to the other alternatives (these alternatives could be a car, public transit, bicycle, etc.).

Silly Arguments?

Does my argument about the evidence for why a tractor is the best vehicle sound silly? Well it should, but it is no sillier, no less evidence-based, than the argument presented for why ERP has helped companies. Most fallacies in life—from fad diets to exercise machines seen on television to ineffective medical treatments—are essentially based upon anecdotal evidence with no supporting research. The comparison of something against nothing is one of the major ways in which individuals are led to false conclusions. The comparison can never be between “something” and “nothing,” but must be between two “somethings.” People who compare something to nothing are stacking the deck in favor of the “something” and are not promoting research or a logical and serious framework.17 A certain exercise cannot be compared against no exercise at all, unless the intent of the study is to show the benefi ts of exercise versus inactivity. All tasks that are performed, all effort that is expended, all resources that are dispensed—everything can be expended and dispensed in a variety of ways.

The normal objective is to find the one best way. The direct costs of ERP systems have continued to rise because when companies give over so many modules to one vendor, they also give up a lot of negotiating power. The ERP vendors use their increased leverage in several ways. One way is to sell uncompetitive software in other areas in the same account. A second way is to increase the cost of the yearly support contract. Generally the TCO of on-premises ERP systems is considered to be high compared to other application categories.

Conclusion

If this chapter has been surprising to you, you are not alone. When I first began researching the material for this chapter, I was unaware that every one of the proposed logics for the purchase and implementation of ERP systems would prove to not only be wrong, but also spectacularly wrong. I was stunned that these amazing mental errors had not been reported in trade publications, as the lack of articles on these errors means that a multitude of actors have been misleading readers as to the benefi ts of ERP systems. I don’t necessarily believe that there was a nefarious motivation on the part of all the people who have written about ERP vendors over the years. Certainly, vendors and software companies have been writing marketing literature and have zero interest in printing the truth. However, many journalists lack research skills and instead simply repeat what they hear about ERP. Getting at the truth is why it is so important to perform actual research when making software selections, and this is true not only of the individual applications within a software category, but of the software category itself. As an example, in the late 1990s many companies purchased marketplace services, a classifi cation of services that was introduced with great fanfare by both software vendors and IT analysts, as the following articles in the references discuss.

However, there was very little evidence that this trendy category—marketplace services—would work out. In fact, the only one that did was Covisint, but it is really only a shadow of what it was projected to be. That is interesting, because I worked in a software company that promoted these “marketplaces,” and at the time they were pitched as the future of business-to-business commerce. These days there is a new software category that has no benefi t other than allowing forecasting departments to falsify their forecast accuracy.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

http://www.scmfocus.com/scmhistory/2010/07/how-analysts-got-everythingwrong-on-marketplaces/

http://www.scmfocus.com/demandplanning/category/demand-sensing/

Bottom line: before companies begin making determinations between various software vendors within a software category, the company should establish both the TCO and the actual benefi ts of the software category.

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
Categories TCO

How to Understand The Lack of TCO Estimation in Software Buyers

Executive Summary

  • The last thing most IT buyers want is an accurate TCO calculation.
  • This article explains why IT buyers prefer an underestimated TCO.

Introduction

TCO is barely performed in any shape or form in IT for either software selection or other IT decisions such as outsourcing, and when it is done, it is usually done poorly. However, I do not want to give the impression that this issue is specific to IT. Companies have major problems performing TCO, and these problems extend to all manner of areas. One is manufacturing outsourcing, where many outsourcing decisions were made by comparing part costs and not by performing a TCO analysis. Many companies compared the direct part cost between the US and China, found a lower cost of between twenty-five and forty percent, but did not consider other costs! Costs such as longer lead times, reduction in supply chain fl exibility, loss of control over the supply chain, bottlenecks, as well as many other costs needed to be evaluated before the outsourcing decision was made. The following graphic from Archstone Consulting shows all of the different cost categories that must be analyzed in manufacturing outsourcing.

Most companies that performed manufacturing outsourcing were not interested in getting to this level of detail. It was far easier to simply compare part costs and assume everything else would stay about the same. This is what passes for analysis at many companies. Based on a 2009 survey, Archstone Consulting estimated that sixty percent of manufacturers ignored twenty percent or more of the costs of offshoring.

Factors Left Out of TCO Analysis

Many factors are left out of the TCO analysis of manufacturing outsourcing, including the following.

“Currency Fluctuations: Last year’s invoice of $100,000 could be $140,000 today.

  • Lack of Managing an Offshore Contract: Underestimating the people, process, and technology required to manage an outsourcing contract. 
  • Design Changes: Language barriers make it diffi cult to get design changesunderstood and implemented.
  • Quality Problems: Substitution of lower grade or different materials than specified is a common problem.
  • Legal Liabilities: Offshore vendors refuse to participate in product warrantees or guarantees.
  • Travel Expenses: One or more visits to an offshore vendor can dissipate cost savings.
  • Cost of Transition: Overlooking the time and effort required to do things in a new way. It takes from three months to a year to complete the transition to an offshore vendor.
  • Poor Communication: Communication is extremely complex and burdensome.
  • Intellectual Property: Foreign companies, particularly Chinese, are notorious for infringing on IP rights without legal recourse for American companies.”
    — Michele Nash-Hoff

Considering the numerous accountants and fi nancial experts that work in so many companies, the rudimentary nature of how companies make cost decisions can be shocking.

“Accountants deal with hard costs such as material costs, material overhead costs, labor costs, labor overhead costs, quality costs, outside services, sales, general and accounting costs, profi ts, etc. What they don’t measure are the intangible costs associated with business such as the true costs of delay, defects, and deviations from standard or expected processes (the three D’s).” — Michele Nash-Hoff

Finding Help with TCO Calculation

Much of what I have described up to this point makes it diffi cult for companies to get assistance in developing accurate TCO calculations. Hypothetically, IT analyst firms should be good candidates for performing TCO analysis. Gartner, the largest IT analyst firm in the world, is actually credited with first introducing the concept of TCO to enterprise software. However, as has been discussed, most IT analyst firms have major conflicts of interest because they sell consulting services to vendors. They also take considerably more money from the large vendors in comparison to the smaller vendors—and not coincidentally larger vendors tend to charge more for their software, more for their consulting, and so on. The upshot is that the TCOs of large vendors will be higher. Since the vast majority of IT analyst firms take the most money from vendors with the highest TCOs, they have little incentive to provide detailed TCO analyses, as doing so would probably cause them to lose some of their software vendor consulting revenues. Also, different IT analyst firms have different interpretations of TCO. Gartner for instance tends to be “pro-TCO,” while Forrester tends to be “anti-TCO,” proposing that most companies cannot aspire to TCO successfully and that simpler approaches should be used. Forrester also points out that, according to their surveys, only about twenty-two percent of purchasing companies use any type of TCO in their decision-making.

Is TCO Even Possible?

Several entities disagree on whether or not a full TCO analysis should be a goal. In this section we will review the concerns leveled frequently at TCO. One of the entities—which could be labeled as anti-TCO and which is influential in the area of enterprise software decision-making—is Forrester, the IT analyst firm.

“To really implement TCO-based analysis it takes a comprehensive and continuously updated catalog of asset inventory, in-service dates, agreed upon operating cost rates for activities, and a scheme to divide shared costs among the constituent business processes that use them. For most firms, this is a pipe dream viewed either as a waste of resources in a futile quest for achievement or too intimidating to even begin. Forrester recommends a more expedient and realistic fi nancial approach that can be just as effective but much simpler to calculate—relative cost of operations (RCO). RCO can be a middle-ground solution, moving far beyond acquisition-cost-only analysis, while being more achievable than a full-blown TCO.” — Forrester

I agree with Forrester’s assertion that companies rarely use TCO, but I do not see why performing a complete TCO analysis is beyond most companies if they are properly advised. Because we take no money from vendors, we can legitimately say that our TCO analyses do not have a bias. One could always propose other non-financial biases—and these are possible and also come down to whether you consider exposure to a topic to be a bias or to be knowledge (babies after all are completely unbiased and open minded)—however, if one analyzes the major problem with respect to objectivity in analysis in not only the enterprise software arena, but also other areas such as fi nancial advisement—consistently the problem is financial bias.

This is true to such a degree that once financial bias is removed one has taken care of the vast majority of the problem. Forrester is not alone in their concerns regarding TCO. The white paper Rethinking TCO takes a similar view of TCO as Forrester. Rethinking TCO points out some of the limitations of performing a meaningful TCO analysis when they state:

“The large amount of variability in product complexity and comprehensiveness from one enterprise vendor is an important limitation on the potential for using TCO in multi-vendor analysis.”

Explicit and Implicit TCO

However, this type of calculation will be performed either implicitly or explicitly (with an actual TCO); therefore, it is diffi cult to see how the approach of not performing the analysis is better than performing a TCO, especially considering what is at stake. In fact, merely performing the analysis—imperfect as it may be—puts a company in a more analytical frame of mind during their selection process.

Rethinking TCO also made the following argument against TCO.

“…different companies within the same industry may have signifi cantly different business processes expressed in the same software product, or may have extensively customized a standard software package in order to gain some degree of competitive advantage. Indeed, this variability in use often represents a key strategic value for the enterprise software package: by using a standard software product in a nonstandard or customized fashion, many customers hope to gain competitive advantage over other companies in their industries that may be using the same or similar software.”

That is all true. However, this is where the implementation experience of individuals performing the TCO comes into play. If they are suffi ciently experienced, they can increase or decrease the cost of a particular item through their knowledge of how much customization can be expected on the project. Furthermore, a noncustomized TCO value probably would not make a lot of sense. It appears that this is an argument against non-customized TCO calculations.

“The implementation process is another major factor that adds to the problems with using TCO as a vendor selection tool. Implementation costs figure as one of the largest single expenses in enterprise software, and yet they are neither standardized nor consistent from one vendor to the next or one implementer, or implementation, to the next.”

TCO Estimation

While true, this can easily be accounted for in the TCO estimation, so it is difficult to understand the exact concern. Yes, implementation times can be adjusted for TCO estimations. And that is not the end of it; maintenance is quite different from one software vendor to the next and we adjust the maintenance costs per software vendor. If the implementation involves a large brand-name software vendor, we again extend the implementation timeline. For example, when we develop estimates for software vendors like SAP (which is neither designed to be easily implemented or easily used), we impose higher costs than any other software in the enterprise market. SAP takes longer to install, which means implementation costs are high, as are maintenance costs. This is why it is so important to check that the software functionality is reliable and usable; not only is the application more effective, the cost of the implementation is reduced, thus reducing its TCO and increasing its ROI.

Conclusion

Companies that implement enterprise software often skip TCO evaluations because they require effort and would get in the way of making trendy purchases. Most executive decision makers tend to believe in safety in numbers, and that means buying and implementing what other companies are buying and implementing. As for consulting companies, because they are surrogate software sales entities (that is, their interests are aligned with software sales because these sales drive consulting revenue), they are not oriented to the consumer or purchasing side.

Custom TCO Estimates and Consulting

  • Want Help with TCO for your Business?

    It is difficult for most companies to estimate TCO without outside advice. Vendors and consulting companies do not want their customers to know what they TCO is. Getting TCO advice from consulting companies leads to underestimated TCO. We do offer remote unbiased multi-dimension TCO estimation.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

References

http://www.forrester.com/TCO+Is+Overrated/fulltext/-/E-RES44545?docid=44545

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
Categories TCO