Measure Before Buy: How To Evaluate TCO Of A Social Collaboration Solution?
Written by Denis Zenkin
January 02, 2011
Software Costs: Rocks below the Surface
Buying any software may bring an organization a number of unpleasant surprises. It is absolutely different from buying, say, a car. You see what the car has standard and can pump it up with some additional options. You can hardly choose options for software but nevertheless the gap between a box and a real implementation may require significant investments causing the total cost to skyrocket. Simply put, you have to buy hardware, an operating system and third-party software, then install it, deploy the solution, integrate it with inherited business applications, train users, take into account maintenance, license renewal and a plethora of other expenses.
In fact, calculating how much the system will cost and what the return on investment will be are two questions of the greatest concern for a software buyer after short-listing applications by their features. It is hard to underestimate the importance of understanding the difference between the price and the total cost of ownership (TCO). This is especially important for social collaboration solutions and other server-based business applications to avoid pitfalls and unexpected costs.
Industry analysts confirm the fact that the software acquisition price is only a minor part of how much your organization will have to pay to get the software up and running. According to IDC in "Demonstrating Business Value: Selling to Your C-Level Executives", software acquisition totals to approx. 7% of TCO, while other 93% of expenses fall into staffing and maintenance, hardware, training, outsourcing costs and downtime.
The Numbers and Formulas Part
Let's see what's inside TCO? Frankly, some readers may find this part boring. If you start yawning, feel free to jump to the next chapter to get the summary.
The TCO methodology, which was first introduced by Gartner back in 1987, had an idea behind it is as simple as possible: calculation of all possible costs a company could bear during a solution's lifecycle. For more information, the TCO page on Wikipedia provides a comprehensive view on this term.
The standard evaluation of TCO includes the following steps:
- Assessment of implementation costs paid before the solution is put into operation. These are one-time expenses which can be regarded as an initial investment.
- Assessment of maintenance costs (periodic expenditures). Though these kinds of expenditures may seem less important, they can exceed implementation costs significantly, especially over several years. We recommend considering at least a three-year horizon for maintenance costs.
- Finally, estimations are adjusted for implementation risks. The purpose of the adjustment is to reduce inaccuracy which arises from possible implementation delays (which are nearly inevitable as practice shows)
The implementation costs include:
- Software licenses: This item includes costs for a selected software acquisition and third-party software like operating system, web servers and databases. Software buyers are recommended to carefully check the later costs as they can exceed the social collaboration cost many folds.
- Hardware: Bear in mind that the solution's readiness for virtual environment like VMware may cut this expense item as you can run it on the same physical server as e-mail, proxy or other business-critical application.
- Setup and configuration: Time required by IT specialists for software installation and initial configuration.
- Testing and content population: Time required to test and initialize the software.
- Training and education: Time required for users to get acquainted with the software functions and features.
The maintenance costs include:
- Technical support: This item depends on the vendor's policy. Some include one year of free support with a yearly renewal fee. Some sell support per-request or for a given number of hours.
- Hardware maintenance: Server maintenance costs, placement costs, spare parts costs and electricity consumed.
- Management: Time a system administrator spends on software management.
- Content management: Time required to add, edit, delete and update the solution's content.
- Ongoing education: Time new users (i.e. the new employees) spend for learning the basics of social collaboration software.
So...What's Next?
The software buyer may be at least confused after reading the previous chapter. Should you do all the calculation yourself? Or should your organization create a special team for software TCO assessment? Or apply to an unknown consultant providing such services at a reasonable price?
Definitely not. To all the rhetorical questions above.
Decent software vendors understand the customers' demand and strive for a maximum transparency to avoid any sort of the after-purchase surprises. Normally an organization needs to submit basic input parameters (like number of users, average salary, staff upkeep and staff turnover) that will be enough to calculate the social collaboration solution's TCO. Moreover, some vendors implemented online self-service TCO calculators where you can play with the numbers and choose an optimal implementation plan. A sample online TCO calculator is available at the Bitrix website.
Finally here is my parting wish for software buyers: don't let the price mislead you. Always think the TCO way. Insist that the social collaboration vendor to provide you with at least a rough calculation of this financial indicator.
http://www.capterra.com/articles
