Know Your Software TCO & TVM

I’m a big fan of SaaS (Software-as-a-Service). I’m a big fan of the many benefits it offers, including almost instant deployment, immediate upgrades, and the fact that the provider handles the administration, maintenance, security, upgrades, backups, and other IT headaches that most companies just don’t have the IT resources for. And I’m a big fan of the economies of scale that are inherent in a true multi-tenant instance. But I am not a big fan of the recent marketing by a number of the vendors in the space that have recently gone “on-demand”. Most of these new “On-Demand/SaaS” providers have taken a myopic focus on TCO in their marketing, and are making strong claims that On-Demand/SaaS is always cheaper – which is not true.

Regardless of the software delivery model you select (on-site, hosted/ASP, on-demand/SaaS), there are a lot of factors to consider with respect to the Total Cost of Ownership and which model is cheaper ultimately depends on the specifics of the vendor pricing and your internal costs of support. A true multi-tenant SaaS provider who takes full advantage of the economies of scale across a large customer base and who passes those savings on to you will often be cheaper, but this is not always the case. Some On-Demand/SaaS providers aren’t as cost efficient as they claim, some solutions require a lot of manual (data) maintenance and user support (which results in hefty service fees), and, let’s face it, some providers, who will do a magnificent job of convincing you that on-site costs more than it actually does, will charge as much as they can get and use the bulk of your monthly subscription fees to line their pocket books with large annual bonuses. If you can’t calculate the true TCO of each solution under considering, you’ll never know which solution is more cost effective and when you’re truly getting a good deal.

I’ve addressed this issue in the past for e-Sourcing and e-Procurement systems in my post on uncovering the true cost of on-premise sourcing & procurement software (spreadsheet), but since many of you will soon be buying / upgrading again now that money has finally started to trickle back into your budgets, I thought I’d address it again. Especially since the calculation isn’t that much more involved for just about any type of Supply Management technology you might be considering. Basically, all you do is compute the (expected) x-2, x-1, x, x+2, and x+2 year amortized solution cost for the length of time, x, that you expect to maintain and use the software (based on typical enterprise solution lifespans in your organization) for each product under consideration, compute the average annual amortized cost, compute the expected savings, and select the solution with the highest ROI that best fits your organization.

Depending on the delivery model, the following will contribute to the total solution cost:

  • License Cost
  • Maintenance Costs
  • (Expected) Upgrade Costs (to Major Versions)
  • Base Hardware & Networking Costs
  • Hardware Upgrade Costs
  • (3rd Party) Data Costs
  • Database / Data Warehouse Costs
  • Application Server Costs
  • Reporting / Analysis / Optimization Engine Costs
  • Other Required Software Costs
  • System Design, Implementation & Integration Costs
  • Security Costs
  • Support Costs
  • (Re-)Training Costs

You calculate the total cost for each time-frame on a cost component basis using expected upgrade schedules, pricing trends, and expected utilization curves. Then you divide the expected total cost of ownership by the time frame and you get your annual amortized cost, or TCO by year.

Then you compute the expected savings by computing the expected cost savings in each of the following primary dimensions:

  • spend reductions (you expect to realize

    equal to savings you expect to negotiate minus savings you expect to lose to maverick spend)

  • efficiency / productivity improvements
  • risk mitigations (which prevent losses due to supply disruptions, non-compliance fines, etc.)

Finally, you can compute the (annual amortized) ROI, or the Total Value Management, of each solution as the (annual amortized) expected savings / expect cost. Then you can truly compare each solution under consideration on a cost, and value, basis.

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