Why Do You Need to Calculate the Total Cost of Ownership of Software Acquisition?

Many companies, when opting in for custom software development, are facing a few important choices. First, the company should determine if they want to build an in-house development team or outsource the development. For various reasons, a big percentage of businesses choose outsourcing, which creates a second dilemma: what outsourcing vendor to choose?

Though we strongly advise against making the price the determinant factor for any decision, business executives tend who don’t have a lot of experience with software development, tend to compare potential partners mainly on this ground. It might seem like a simple way to save money, but in fact, it is a path to inflated total costs and additional expenses you have not predicted. 

Low development rates, especially if they are above the market average, might say that the vendor sacrifices something in the process that other similar companies do not. It might be the seniority of the developers, the process reliability, etc. The low cost of the whole development achieved by a shorter deadline might say about a lack of attention to certain processes like quality assurance, software testing, etc. 

All of these aspects might mean that you risk receiving a software piece of lower quality. And the optimized cost you expected will turn into additional maintenance costs, which, in our experience, will significantly exceed the difference you wanted to save. 

Hence, when you are calculating how much money custom software is going to require, you need to consider all costs involved, not only the price your vendor charges for the development. 

At the same time, to leverage the full potential of TCO, you should consider it together with the other metrics — return on investment (ROI). ROI will show what output you can expect from the money you put into software development and help you to evaluate if this investment is going to be profitable.