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21 cost elements to include in your ERP TCO calculation

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With differing definitions and more hidden costs than you can shake a stick at, ERP TCO can be a tricky beast to tame.

1 cost elements to include in your ERP TCO calculation

Posted on 11/09/15 by Rick Carlton

The modern definition of total cost of ownership (TCO) was established in the mid-80’s by Gartner Research, although prior to this event, the concepts of identifying, calculating and measuring the cost of known operational expenses had been applied since the industrial age. However, the emergence of new technologies, primarily in the form of computing and software systems, required a different slant on previously accepted cost accounting methods. Consequently, in the ERP market, the Gartner definition became the ultimate rule rather than the exception.

Differing definitions

That said, and just to refresh the reader’s mind, here is how Gartner formally defines TCO “For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.”

Recommended reading: 50-step ERP software selection checklist

Now, there is a school of thought which excludes the software acquisition costs in ERP TCO calculations. Some of you may be about to jump up and yell, “how can the software cost not be a vital element of TCO?”. Well it is and it isn’t, depending on who’s doing the measuring. Some financial folks consider pre-operational software and license purchases to be ‘capital expenses’ (CAPEX) and, therefore not necessarily related to the calculation of active ‘after purchase’ operational costs. At the end of the day, adding or discarding these cost elements within an ERP TCO analysis typically comes down to the particular pricing model employed or the desires of an enterprise’s COO or CFO.

Now that we’ve put paid to fuzzy accounting concepts associated with what is, and isn’t a valid calculation, let’s look at some of the common elements which should be included in an ERP TCO:

  • Networking hardware and software costs
  • Server hardware and software costs
  • Workstation hardware and software costs
  • Installation and integration of hardware and software costs
  • Data migration costs
  • Risk management; i.e. potential vulnerabilities, upgrade availability, patch and future license management etc.
  • Infrastructure enhancement costs
  • Power costs, i.e. affiliate equipment, climate systems, backup power systems
  • Quality assurance and testing costs
  • Downtime and outage costs
  • Reduced productivity costs, i.e. acclimatization to system, diminished money-making ability
  • Security including potential breaches, loss of brand reputation, recovery and future prevention
  • Backup systems management and recovery costs
  • Training and user adoption costs
  • Process auditing costs, i.e. internal and external
  • Process re-engineering costs
  • Insurance costs
  • Stand-in and special personnel costs
  • Project management costs
  • Future upgrade or scalability expenses
  • Legacy platform decommissioning costs

All of these elements, along with virtually every other hidden element that costs more than the price of a paper clip, should be applied to an ERP TCO in order to understand where one’s budget is going. Cost, not revenue, is often the primary gating issue when it comes down to executing a successful ERP project.

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