Total Cost of Ownership of Staffing Management Solutions

May 6, 2002

“Total Cost of Ownership,” or TCO, is a concept used to represent the true costs of owning enterprise software. TCO seeks to measure all of the expenses, both human and technical, behind a given technology initiative. It includes all costs related to the technology lifecycle, including procurement, deployment, maintenance, and support. Thinking in terms of TCO helps in the understanding and management of the budgeted, unbudgeted, direct, and indirect costs incurred in acquiring, maintaining, and using an enterprise computing application. A TCO analysis is useful for budgeting purposes or for choosing between alternative technologies. A TCO analysis performs calculations on extended costs for any purchase, generally referred to as “fully burdened costs.” When contemplating an IT purchase, the reality is that the number on the invoice is not the real cost an organization will end up paying out down the road. The fear of unforeseen costs has prompted many companies to employ TCO tools to determine the true impact of buying and maintaining technology solutions over time. It is a formulaic process to minimize risk, especially when budgets are tight and priority lists shortened. However, it is not appropriate to evaluate potential solutions based on TCO alone, ahead of considerations such as the ability of the software to perform the critical business function. A TCO analysis is to be used only when all other things are equal. With budgets and spending under scrutiny and astronomical costs associated with enterprise resource planning (ERP) implementations, calculating TCO has become increasingly significant, especially for CIOs and CFOs. Computing TCO The full lifecycle of an enterprise application must be considered when assessing TCO, from acquisition and implementation, through ongoing support, to eventual upgrade. Costs breakdown into direct and indirect costs. Direct, budgeted expenditures relating to the solution itself include costs for the software. In some cases, there will be substantial additional costs for the hardware and IT infrastructure necessary to run the application. A staffing management solution from an application service provider (ASP) simplifies a TCO analysis greatly, since it does not require the purchase of hardware or upgrades to a typical company IT infrastructure. In essence, the company does not “own” the software, it just pays a usage fee ó though many such providers will place the source code in escrow if requested. If you do not license the application from an ASP (which generally provides technical support), be prepared for stiff charge-backs from the IT department to support and maintain the hardware infrastructure necessary to run the application behind your company firewall. The second component of direct costs is labor, which includes consulting, technical support, operations, and administration. Support and training make the system work for users, and the price of those services must be factored into the TCO. Indirect costs are a more difficult aspect to quantify, but they can often add significantly to the TCO. Indirect costs include unproductive end-user time, troubleshooting, and system downtime. Indirect costs can also be reduced by benefits accrued after implementation ó the opposite of incurring costs for delay (see my past article, The Cost of Delay). TCO for Staffing Management Solutions A recent study by the META Group found that 80% of companies in the midst of enterprise computing initiatives could not compute the TCO for the project. But don’t be in the dark when it comes to your staffing management solution. Examine every area of cost or effort at every key milestone in the lifecycle of the solution. For instance, indirect costs also include the opportunity cost to the corporation of not filling positions in real time. For direct costs, it is helpful to break the TCO analysis into initial and ongoing costs. 1. Initial costs:

  • Software licensing fees
  • Hardware costs*
  • IT infrastructure costs*
  • Professional services for configuration
  • Internal staff costs for implementation
  • Internal staff costs for IT support*
  • Integration
  • Initial user training
  • Data conversion
  • Add-on software licensing fees

(*if applicable) 2. Ongoing costs:

  • Software maintenance fees
  • Major upgrade costs
  • Operating costs, per transaction
  • Internal staff costs for IT support*
  • Ongoing training
  • Hardware and IT infrastructure maintenance, upgrades*
  • Tech support
  • System administration labor costs

(*if applicable) Conclusion In sum, the best way to avoid mistakes in technology evaluation and implementation is to consider the total cost of ownership and plan accordingly. In addition, it is important to assess the value that technology can have for your internal operations and programs. The TCO has to be compared to the total benefits of ownership to determine the viability of the purchase. Combining the financial and human resources necessary to run and support the business application will give you a sense of the TCO for a particular staffing management solution. Just as all staffing management solutions do not have identical functionality, they also do not necessarily have equivalent costs nor provide comparable value.