In our last post, we talked about how you defined lifetime total cost of ownership models and what the key cost components of each major software delivery model were, reviewed below. In today’s post, we discuss how you will usually calculate each of the cost components.

Based on these model requirements, you can build a spreadsheet that allows you to calculate and capture each cost component using all of the information available to you. These spreadsheets can then be modified during negotiations to capture the true total cost of ownership over the projected lifetime to understand the true cost of each proposal put before you, or your expert negotiator. Each of the costs above can be calculated as follows:

• License Cost
  The license cost will either be a fixed price or an annual fee. In the first case, it’s a simple input, and in the second case, it’s the annual license fee times the number of years you intend to use the solution. (It’s a good practice to also calculate the costs for a range of years in multiple columns. If you think you’ll use the application for 10 years, calculate values for at least an 8 year and a 12 year ownership term as well to understand how costs change over time.)
• Maintenance and Support Cost
  This is usually a percentage of the license cost each year. As such, it’s easily modeled as a percentage of the license cost multiplied by the number of years you intend to use the solution.
• Dedicated Server Costs
  You’ll likely have to add servers to support your new acquisition. The cost will be the number of new servers required times the expected server cost. (Note that tough times will get you great deals on hardware using a reverse auction.)
• Supporting Software Costs
  Many enterprise applications require database licenses and application server licenses (and some will require middleware licenses as well). These applications generally have license fees, maintenance fees, and per CPU and/or per seat fees. If you are lucky enough to already be licensing the supporting software, the cost will just be the costs to support the new application, calculated either as the number of new CPUs times the per CPU cost or the number of new seats times annual seat cost. If not, you’ll have to add in the license costs and the annual maintenance costs of the supporting applications as well.
• Implementation & Customization Costs
  In the world of enterprise software, there really is no such thing as “it works out of the box”. At the very least you have to load your data. Usually, you’ll have to bring in a hired gun to install it, customize it, and get it working efficiently on your systems. If you’re lucky, this will be a reasonable fixed fee. If not, it will be a by-the-hour fee (and you’ll need to ask current/past customers to get an idea of the number of person-hours that will be required.)
• Integration Costs
  If you need your new system to talk to, or work seamlessly with, other systems, you’ll likely have to do some integration. You’ll probably have to consult with a third party integrator to get an idea of project size, which will determine what will likely be a day rate based quote.
• Training Costs
  Although it’s getting better, most enterprise software is still a long way from “Web 2.0” and your staff will generally need to be (extensively) trained to take full advantage of the system. This will usually be a fixed rate per course or student.
• Internal Support Costs
  Even if the vendor installs and configures the software and includes “support” as part of maintenance, the support will generally be limited to bug fixes. You’ll still need internal IT resources to manage the instances, manage the servers, and support your users (and the required operating environments). The annual cost will be the estimated number of annual resources required times their average annual salary.
• Software Upgrade Costs
  Depending on the vendor, every 2 to 4 years they’ll release a major new version of their (on-premise/ASP) solution and discontinue support for an older version around the same time. This means that, every 2 to 4 years, you’ll have to upgrade, for a hefty fee, or risk losing support. This cost can be estimated by looking at the vendors historical major release cycle and average upgrade cost as a percentage of previous system price.
• Hardware Upgrade Costs
  Every 3 years, your hardware will need to be replaced. Even though the cost per performance unit continually decreases, you’ll need a more powerful machine at upgrade time as your users will be using the system more heavily, the software upgrades will demand more computing power, and you’ll need to support your (hopefully) growing business. A safe bet is to expect the upgrade costs will be roughly equal to the initial hardware costs.

In our next post, we will tackle negotations and how you should go about defining your ultimate objective.