A thorough Total Cost of Ownership (TCO) analysis is a great tool to help CEOs and CFOs compare the costs of different software solutions. It takes into account the initial and long-term costs of creating new software for your business. Assuming that you’ve determined that your business is ready for custom software and business automation, your next step is a good cost analysis. Let’s take a look at this model.

How is Total Cost of Ownership Calculated?

When designing and building a custom software package for your company, there are two key cost components. First is the up-front cost to develop it. Then comes the ongoing upgrade and maintenance costs. Down the road, you can also plan for a major upgrade. The perfect tool to account for these costs is the Total Cost of Ownership model for custom software. It will help you evaluate your software development options.

Components to the Software TCO Model

Startup Costs:

Hardware: Includes servers, networking components, cabinets, etc.
Software Platform: Includes databases, operating systems, etc.
Software Development: This will include discovery, design, and project management of your software
Implementation and Training: Time and resources spent rolling out the new software to your users.
Data Migration: Moving your existing data out of your current solution and into the new software.
Documentation and Training: This includes writing documentation and initial training of your users.

Ongoing Costs:

Maintenance (Updates): You will need to ensure that both hardware and software components remain current.
Upgrades: This may include new features and functionality, adding in new integrations, and complete upgrades to components of your software.
Ongoing Training: New employees and feature upgrades require ongoing training.
Licensing (hardware, software, plugins, etc.): Hardware and software packages often come with annual licenses that provide access to updates and support.
Security: In today’s world, cybersecurity is paramount, and keeping your software updated and patched for security is vital. Read: Why is Cybersecurity important?

Additional Reading: In-House versus Outsourced Software Development: Why Hire a Developer

Short Term Costs versus Long Term Costs

Short term costs are typically those that will accrue in the first 12-18 months. These will include the Startup costs and some of the initial Ongoing costs. Ongoing costs are budgeted annual numbers to keep the software running, secure, and scaled. In your TCO model, you’ll want to have budget columns for the first three years and extrapolate over 5-10 years (expected lifespan of your software) in addition to the initial setup costs.

The Custom Software TCO Model

Below is a simplified example of a TCO model. This can be used to compare two methods of implementing new software, for example in-house versus outsourced.

Outsourced Development

Cost Component	Startup	Year 1	Year 2	Year 3	Total
TOTALS	$24,200	$700	$700	$700	$26,300
Hardware	$100	$100	$100	$100	$400
Platform	$100	$100	$100	$100	$400
Development	$20,000				$20,000
Implementation	$2,000				$2,000
Training	$1,000	$200	$200	$200	$1,600
Data Migration	$1,000				$1,000
Upgrades		$100	$100	$100	$300
Maintenance		$100	$100	$100	$300
Licensing		$100	$100	$100	$300

In-House Software Development

Cost Component	Startup	Year 1	Year 2	Year 3	Total
TOTALS	$5,500	$10,500	$10,500	$10,500	$37,000
Hardware	$1000		$500		$1500
Platform	$500
Development (FTE costs		$10,000	$10,000	$10,000	$30,000
Implementation	$2,000				$2,000
Training	$1,000	$200	$200	$200	$1,600
Data Migration	$1,000				$1,000
Upgrades		$100	$100	$100	$300
Maintenance		$100	$100	$100	$300
Licensing		$100	$100	$100	$300

Common TCO Calculation Mistakes

When working through your TCO analysis, there are two key mistakes that businesses often make. First is not accounting for soft costs, including allocation of employee time to internal training, setup, configuration, etc. Second is not accounting for expenses in one model in the other model. For example, if the software needs to be updated, it needs to be updated regardless of who is doing it. With in-house implementations, time allocated to these activities by employees must be accounted for.

Plan Your Custom Software

Contact us today to start planning your custom software solution. We can help you analyze the costs and make the right decision for your business.

Custom Software TCO Analysis