Know Your Real Software Cost

Know your software costs

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January 9, 2016

When buying software for your business it can be tempting to view it like any other everyday purchase, look at the price tag and on the basis of what you read there decide whether or not you can afford. Unfortunately, that price tag is just the tip of the software cost iceberg. The question you need to be asking is, what is the total cost of software ownership (or TCO). The TCO consists of both surface and hidden costs, both of which you need to explore as fully as possible.

Surface software costs are those that are ‘obvious’ and include:

  • The purchase price or license fee.

  • System installation – the one-off cost of getting the system up and running and ready for use, including technical installation, any hardware costs, and user training.

  • System upgrades – at regular periods the software vendor will release an updated version of the software; sometimes this will be driven by the need to address bugs or glitches in the system, at others simply to add extra or improved functionality (which you may or may not need).

  • Direct labor costs – the cost of any staff needed to support the system; e.g. a proportion of the IT department’s time (this is likely to only affect larger organizations).

As if these costs (of which only the first will appear on that price tag) were not enough, often there are also the following hidden costs associated with software which are not so obvious.

However, PwC found that the following ‘hidden’ and often unconsidered costs can account for up to 65% of the total TCO:

  • Non-labor costs – the cost of any extra services provided by the vendor; for example, consultancy charges, commissions, ongoing rental of facilities such as data centers, etc.

  • System maintenance – costs specifically related to keeping the system functioning, including troubleshooting and time lost due to system failures and lack of user training.

  • Indirect labor costs – the cost of any time devoted to the system by employees not directly related to IT; for example, the staff time spent inputting customer details to a customer relationship management (CRM) system.

Depending on the source, consultants and commentators estimate the hidden costs can amount to up to 40-60% of the total cost of ownership. That price tag really is the iceberg’s tip and it can be tempting to see which items (either surface or hidden) can be dropped from the list.

When cutting costs, training is often the first to go. However, without proper instruction, users of any software system will a) likely be unable to use the system to its full advantage; and b) get their instruction elsewhere, from apparently knowledgeable colleagues and peers who may themselves have gaps in their knowledge. Either is a recipe for disaster.

The average software license comes with 90 days of technical support (which is just about enough to see you through the installation and any teething troubles) and after that you pay extra, which can become a serious expense, especially when premium rate phone numbers are used for the tech support helpline. Options include creating in-house expertise, online user forums, or opting for open source software which is likely to have a greater number of available (and expert) users and developers.

When it comes to upgrades, those that address the bugs and glitches are a must – bit the bullet and take them – however, the version upgrades are not quite so ‘mandatory’ which is fortunate as they tend to be more disruptive. If the version you have works for you AND it is still receiving technical support then why change? similarly, beware of being the test bed for the software developer’s innovations – often version numbers 1.0, 2.0, 3.0 etc. are best avoided in favor of 1.1, 2.1, 3.1 and so on which indicate that the initial version teething troubles will have been fixed.

In the end, cutting out items such as training or technical support only save money at the point of sale. The cost of skimping on these ‘add-ons’ only becomes apparent later when you’re not leveraging the full benefits of the software or there’s a problem that you’re left to resolve on your own. It’s at such times that you feel the brunt of the TCO.

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