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Know the True Cost of Software By Dr. Bob Spencer Purchasing any software application to help you run your business more effectively is an important and sometimes costly proposition. There is an important Return on Investment (ROI) component to selecting, purchasing, deploying and supporting software. Software should be viewed as an investment in your business and treated accordingly. The business owner or manager must weigh the benefits of the software solution against the cost to purchase, implement and support the product over its economic life. When purchasing software, we must consider the Total Cost of Ownership, or TCO, over the expected life of the product. When evaluating software for purchase, consider, "What will be the complete cost to implement this solution?" The complete cost includes the initial purchase price; installation costs and any additional hardware you may need to support it properly; training staff how to use the software to provide its greatest benefit to the business; and the cost of data conversion, if applicable. There are also long-term costs to consider. Higher-level software solutions, for example accounting and manufacturing, require an annual support or maintenance fee. This fee provides regular program updates including regulatory changes such as tax table updates and software bug fixes. This annual fee may range from 11% to as much as 21% of the purchase price of the software. Knowing these costs ahead of time and considering these costs in your TCO can make a difference in which solution you select. Another large cost of supporting your software is the deployment and ongoing maintenance of the software. While some software manufacturers release updates to their software annually, many do so more often. Your technology staff must then test and deploy these updates to end-users. This could take hours or weeks, depending on the size of your organization. Either way, there is a noticeable cost to your bottom line. Estimating a cost to deploy and support the product is important and usually requires some research. Project the true cost Using a five-year timeframe will help you better project the true cost of the software. The analysis should include:
Don’t be surprised by the effect the annual maintenance fee has on TCO. A $350,000 software solution would cost an additional $192,500 in fees over five years at 11% per year, and as much as $367,500 over five years at 21%. After you consider the cost to train, support and deploy software updates, the true cost is often two or three times the initial purchase price. This is why estimating a five-year TCO is so critical. Create a prototype environment To determine the cost of deployment and support, your information technology (IT) department must create a prototype environment composed of servers and workstations to install the application and test the deployment methodology on a representative sample group of pilot users. That approach allows you to measure how easy or difficult the product will be to deploy and support. Keep in mind that this is always a best guess, since there is no guarantee that your environment will remain the same. Finding out that a product is difficult to deploy after you’ve purchased and committed to it won’t benefit anyone. It is easier to track and recover from problems in a prototype test environment than in a full-blown deployment. This approach also identifies potential problems before it is too late to plan for them. Enterprise-wide applications such as accounting, wireless warehouse management and computer graphic design solutions have been known to cause a tremendous drain on network resources, so it is important to test for that possibility. If a pilot test detects a substantial drain on network resources or bandwidth, you may need additional hardware or other solutions, again affecting the TCO. Any modifications that need to occur as a result of the pilot test should be documented and included with compatibility-testing and conflict-resolution documentation. Technology professionals should work closely with end-users during the pilot-testing phase to validate that:
Note any discrepancies and configuration issues during the application-testing period and document any adjustments that are made. This sounds like a lot of work, and it is. Often, business owners and managers neglect to properly test proposed solutions prior to purchase because of the cost or time to do so. This decision is often regretted. Failure to include application compatibility testing and prototyping prior to purchase will be more costly than conducting proper testing early on and developing appropriate strategies to deal with issues that arise. Selecting software to help you run your business is a long-term, seven- to 10-year decision. Making a mistake early on creates a situation everyone must live with for a long time, or may never recover from. Take your time; make sure you have all the numbers, and do it right. The end result will be a software purchase that is successful and rewarding. |
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