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.
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.
Startup Costs:
Ongoing Costs:
Additional Reading: In-House versus Outsourced Software Development: Why Hire a Developer
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.
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.
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 |
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 |
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.
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.