Total Cost of Ownership...What Is It? No, Really...
Tuesday, July 10, 2012.
Posted by David Jones
Total cost of ownership is a phrase which is thrown around quite a bit but it is hard to pin down exactly what it is…especially in public safety technology.
According to Wikipedia, “Total cost of ownership (TCO) is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.”
Wow…if you are in charge of selecting a new software solution, how do you figure this into your decision making process? Or do you? Since most of us are not accountants or financial experts, this may just be some lofty acronym and concept that is meant for banks and the auto industry.
When receiving proposals and pricing from different vendors, most will have the same core pieces and parts which have prices associated with them A few of these are the actual product, such as the Records Management software licenses, the associated recommended training, project management services, physical servers to run the software on, etc. Then there is the annual software maintenance fee which may be provided for years 1-5. These items and associated costs allow for a high level “apples to apples” comparison. And adding these up can give a fairly good “cost of ownership” for the proposed solution from the initial purchase price plus total cost over time.
However, there are many undocumented costs that are typically not include or talked about…
Some of these include change management – the pain and lack of productivity the agency and personnel must go through when switching out the old system to the new one. Some vendors do a really good job at this, while others don’t.
Another undocumented cost would be software upgrades. Does the vendor provide updates to the software but not the services to actually install it, test it, and train it? If your agency wants or needs these services does the vendor charge for them? How long is your system down for routine maintenance, backups, and upgrades? Do your employees have to go to pen and paper during these periods and if so, how often and for how long?
How about creating statistical reports or custom forms for your agency…does your vendor charge for these or are they part of the standard maintenance and support cost?
Were these items ever brought up and discussed pre-contract?
More than likely, the answer to these questions is “no”. These would all be examples of undocumented costs that eventually drive the initial cost of owning and managing the solution up…sometimes significantly.
So when you are evaluating new vendor’s solution, it is just as important to pay attention to what is NOT in the quote and agreement as much as what is in it.