Demystifying Technology Investment: Understanding & Determining the Total Cost of Ownership.


By Daniel J. Cavolo  |  December 2009.

So, you have decided to purchase a technology solution to improve services …

Now what? Before purchasing any system, you must first understand what the “total cost of ownership” will be specific to the new system. The total cost of ownership includes the first year software, implementation, hardware, and infrastructure costs, but should also include the costs for ongoing support and licensing as well as ongoing basic IT support not included with software support. Depending on the type of system you’re looking to purchase, the total cost of ownership will vary by vendor system.

Define your organization’s “Technology Baseline”

The first step toward implementing any new system is to establish your organization’s “technology baseline.” A technology baseline can be defined by evaluating your organization’s current PC, server, network hardware, application licensing agreements, network wiring, electrical wiring, current IT support operations, and more…in other words your organization’s technology must be documented, reviewed, and assessed to ensure your current technology environment can support new technology. Regardless of what system you select, it is extremely important to understand what infrastructure components will require an upgrade, and the cost of upgrading the infrastructure, before any system is purchased.

Where NOT to begin

Often organizations start the vendor selection process by inviting potential software vendors into their organization to provide a demo of their software system. Software demos should never be the first step of selecting any technology vendor. Software vendors will often tell you the total cost of the software only. Often organizations take this number as the bottom line cost of the project. The price of the software is not the bottom line number; organizations must take on the responsibility in determining not only the software cost, but also the hardware, network, infrastructure, electrical and other costs specific to their organization. On average, the software cost of any system represents less than 50% of the total cost of the first year of a technology project.

Determining the total cost for new technology specific to your organization

It is extremely important to fully understand the total cost of any new technology system before selecting a vendor. Often different vendors have different infrastructure requirements specific to their system. These infrastructure requirements cost money to implement and are not included in the software cost of a system. Most costs listed below will need to be included regardless of which software vendor you select. The variable cost related to the project is the cost for the software and software training itself. Systems vary in cost and functionality. Buyers beware when it comes to software – you get what you pay for.

 

Please review this list below keeping in mind that most vendors only quote the costs associated with the first four points:

Software Licensing costs – this is the cost charged by the vendor to use their software.

Software Training costs – this is the cost charged by the vendor to train your users on their software system (not to train your staff on “how to” use a PC)

Implementation costs – this is the cost charged by the vendor to implement the hardware you purchase direct from the vendor (not the hardware you purchased from other vendors, i.e. new PC’s, routers, switches, wireless network); the vendor will often assign a project manger to the implementation. The project manager provided by the software company is only responsible for implementing the project tasks related to the software side only. It is recommended to hire or appoint another project manager or project director to manage the complete project and represent your organization’s best interests to deal with all vendors involved.

Ongoing Support costs – this is the cost charged by the vendor to support their software (and possibly any vendor specific hardware supplied) for the life of the contract. This is NOT the cost to support your organization’s PCs, servers, network devices, other applications, etc. – the vendor does not become your IT support for daily break/fix support. The onus, and cost, is on you.

Network Infrastructure installation cost – new network drops for staff that will now require a PC at some locations (eg. point-of-sale terminals or new back office admin locations)

Wireless Network installation cost – installation of cables, switches, routers for wireless network

Server, Desktop PC, Palm / Handheld / Tablet – operating system licensing and installation costs

UPS or battery purchases – All PCs, servers, and network devices used for some systems must connected to the UPS, with the UPS connected to the generator outlets.

New Electrical Drops – remember often hardware used for mission critical systems must be connected to a backup generator outlet to ensure the system is available during a power outage.

Software Interfacing costs – Often organizations prefer to have a new system inter-phase with their current financial or other accounting systems. Many software vendors offer this service at no charge…but this only means the new software vendor will not charge for their work on the inter-phase. The current financial or accounting software company will charge you to build an inter-phase. Before signing any contract with any vendor, receive a written confirmation from the potential software vendor, financial vendor, and other current vendors used today in your organization that their software will interface to the new system and have each vendor provide an estimate before you sign with any new vendor. If the vendors will not inter-phase you now have time to set the proper expectations with staff and create a new process flow related to data transfer (i.e. manual entry).

Software customization costs – if at all possible, avoid customizing any new system to meet your organization’s unique needs. Remember, the more you customize now, the more the system will cost to support later. Technology is only a tool – “customization kills!”

Basic PC training costs – These costs are related to basic PC training for staff. It is important to provide additional basic PC training for staff that needs it. Staff not familiar with a PC will fail during software training and take months to catch up to other staff members more familiar with the system. If staff is not properly trained on basic PC use, your organization may see a drop in efficiency. Take the time to train staff – set them up to succeed.

Other backup system costs – Your organization must always think “disaster avoidance” and purchases backup hardware when needed – your current disaster recovery and evacuation plans will need to be updated and staff trained on the new procedures.

Ongoing IT support costs – with more technology including PCs, servers, and network devices to soon be installed in your organization with any system, it’s important to remember these devices will need to be supported. Your internal IT support team or IT vendor will be utilized more due to the simple fact more technology must now be supported.

Internal staffing costs – staff will need to be paid for their time spent attending training classes. If you truly want your organization to succeed implementing a new system, you must invest in training. Often staff will need to attend two training sessions or more. These costs are only the hourly cost you will spend training your staff and does not include the training costs itself.

Contingency costs – with any major project, it is important to include a contingency budget. Often unknown costs can arise that were completely unexpected and even the best preparation can miss including these costs. Bottom line, you never know what issues may arise when updating your building’s infrastructure. For example, if your organization consists of two or more buildings you probably have a fiber optic cable under the ground connecting the building’s technology. If the conduit has been cracked or damaged over time, the fiber optic cable may have been damaged. Once new technologies are implemented, you may find the fiber cable will need to be repaired or replaced.

Project Management costs – The project manger (PM) role is critical to the success of any technology project. This role can be filled internally or externally and is your organization’s “general contractor” for the duration of the project and beyond. Do not rely on the software vendor’s project manager to manage all the different vendors involved with the project. With the implementation of any system, many different companies or groups will need to complete tasks and should be included in the master project plan. For example, the companies or groups involved include the software company, local IT vendor or internal IT team, your electrical vendor or maintenance team, the network or wireless installation vendor, your infrastructure hardware vendors, financial application vendor, and more… the PM is the one resource responsible to ensuring all other groups or vendors complete their tasks on time and under budget.

The PM should not be a staff member who has major daily responsibilities. The PM should not be your current IT support manager or IT support break/fix person. What makes a great break/fix mind often does not mix well with managing major initiatives and ensuring many different groups are meeting their timelines. The PM should be a resource who understands technology (engineering, application, support) and your industry (different staff roles and responsibilities). The PM does not need to be an expert technology, but the PM must understand the different components of the technology project and who is truly affected with every decision made during the project.

Post-Implementation costs – your organization now has implemented the new technology, it is important to realize ongoing costs will exist beyond the ongoing software costs. Your organization has more PCs, servers, network devices – so more IT support is needed. As new staff members leave your organization and more staff members are hired, your team will now be responsible for training the new staff members on the new system or you may find a need to hire the vendor to provide additional training services. Over the next few years, hardware will need to be replaced – new PCs, servers, UPS, and network devices replaced and upgraded.

Technology 360 – The Total Cost of Ownership

The costs listed above should be estimated before you sign any contracts with a vendor. Take time to complete your homework before selecting a system. You are forever changing the tools used by staff to provide service, but it’s important to remember that technology is only a tool, not magic. Most new system implementations fail due improper planning, selecting the cheapest system / lowest bidder and not training staff sufficiently. All systems are not created equal so keep in mind that you get what you paid for. For success in your next IT project, always stick to the fundamentals: training, communication, and support. Train your staff, communicate to your management team and vendors, and support all who are involved in the project. These fundamentals will lead to the ultimate success of the project both in the short and long term.


Daniel J. Cavolo is President of The Loyola Group LLC (Cleveland, Chicago, and Tampa Bay), an IT service company founded to assist organizations with new IT initiatives and serve as interim Chief Information Office (CIO), IT Director, IT project manager, or to take the lead on IT assessments. The Loyola Group, LLC is neither affiliated with, nor endorses any specific software company or products. Visit the website for more information at www.theloyolagroup.com