Calculating the total cost of ownership for enterprise software

Enhancements. Applies to custom software where the company must pay developers to provide new functionality as needed, e.g., when the business environment changes or new regulations come into effect. Remember to include documentation and project management costs. Can also apply to customized off-the-shelf software.

User & admin support. This is the cost of helpdesk and system admins and maybe a few analyst/developers who will be supporting the system. Bear in mind that you need to use the fully loaded employee cost, and factor in the costs of managing them.

Disaster recovery & high availability. This ranges from backups through to hot failovers and includes regular testing. Hot failover is very expensive to implement for off-the-shelf or custom software. With cloud products, it is often part of the standard offering, except for smaller vendors. However, there is an additional cost for cloud products, namely being able to recover if the cloud vendor goes out of business.

Data center. The costs of running the software in your data center like power, cooling and floor or rack space. Should also include indirect costs like security, data center maintenance, management of the data center and so on. If you are using a hosted data center, it is the monthly cost of running the hardware used by that software. Applies to off-the-shelf and custom software.

Downtime. The cost to the business when the software is unavailable. Custom software is not tested nearly as well as cloud or off-the-shelf software and is likely to have much higher downtime costs. Off-the-shelf software is more likely to go down than cloud software because cloud vendors invest in things like hot failover.

Depreciation. Writing off the capital cost of the software and the hardware it runs on. Does not apply to cloud software because it is usually an operational expense.

Upgrades. Off-the-shelf software usually has upgrades over the life of the software. These projects can be large, expensive, time-consuming and a real risk to the business. Sometimes also applies to custom software, where a new version is created. Does not apply to cloud software because most vendors continually upgrade their software.

Security. The costs of keeping an application secure, especially if the application is visible outside of the firewall. Does not apply to cloud software because it is paid for by the cloud vendor.

Retirement costs

These are the costs incurred when retiring software. Many companies forget that retired systems can still incur considerable costs, e.g. if you had grown out of one cloud product and moved to another. It was not worth the expense of migrating transactional data, but for compliance reasons it had to be available for several years. Another example is migrating from one helpdesk system to another. Is it worth moving things like the knowledgebase? In many of these situations, it is worth keeping the old system in and archived/read only mode for several years, and there are costs associated with that.

Data export. You want to be able to export existing data in a suitable format. Some vendors make it easy to get data into their systems, but there is little incentive to make it easy to get that data out again so it can be expensive.

Archived systems. You want to keep off-the-shelf or custom software available for reference. You need to keep it running on servers in the data center, with their associated costs. For cloud software, you want the system to be available for reference, preferably in a read-only mode. You want to pay a minimal amount for use of the system, but unless this was part of the original agreement, you could be forced to pay a lot more.

Inactive licenses. You may need to keep all user licenses on the system to preserve audit trails, but you certainly don’t want to pay full user costs for an archived system.

Conclusion

Use the costs above to help estimate a realistic TCO over the lifetime of the software. While this article lists the more common costs, be alert for others specific to your situation.

Typically the TCO and ROI are estimated at the start of a software selection project. When selecting one of several software alternatives on the shortlist, update the TCO of each product for more accurate ROI estimates. You may find much larger differences in ROI than expected, especially when comparing cloud, custom, and off-the-shelf software.

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