How to Calculate Total TCO for ERP
When calculating TCO for your ERP system it’s important to include all the costs, including the non-obvious ones.
Gartner, the company that popularized the concept of Total Cost of Ownership, defines it as: “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.”
More important than the exact definition of TCO is a general agreement on what is included in TCO. Whether you take a kitchen-sink definition like Gartner’s or a more restricted definition that specifically excludes certain categories, it’s important that everyone understands what is and isn’t included.
Gartner’s definition is pretty broad and it covers not just the obvious costs, but things you might not think of as part of TCO, or even as costs.
Take insurance, for example. It is a cost, so it needs to be included in the TCO calculation.
Or to take a less obvious example, consider the costs of a data breach, including direct losses, cost of repair, and loss of business reputation. Those are all included under the all-inclusive definition of TCO.
Similarly, risk management costs, such as patches and risk-related upgrade costs should be included.
It’s obvious that networking hardware and software costs should be included, including the costs of any upgrades over the life of the system. So should the costs of workstation hardware, software, patches and upgrades.
Integration and installation costs for software and hardware are another area that needs to be carefully included. This includes not only costs for external consultants, but labor costs, direct and indirect, for your own personnel working on the project.
This can be tricky because your people are unlikely to spend all their time during the installation period working on the ERP system. Their labor costs need to be separated out and proportioned accordingly.
Power costs also need to be apportioned and included. This includes affiliated equipment, the cost of climate control systems and backup power systems. In general any infrastructure enhancement costs need to be included as well.
Data migration costs are another important area that needs to be costed out carefully. Since this is mostly labor, the problems are similar to labor costs in general.
Downtime and outage costs associated with the ERP implementation need to be included as well.
Of course quality and assurance costs need to be included. Since this is a significant part of the total cost of the project, it must be costed in carefully.
The cost of reduced productivity from the inevitable dip after the ERP system goes live should also be included in the project’s TCO. So should the costs of user training and coaching to get the users up an running on the new system.
Include future upgrade and scalability expenses. Also your best estimate of the future costs of increases in licensing and maintenance costs over the projected life of the project.
Finally, don’t forget the cost of decommissioning the old system after the new system goes live.
When taken as a whole, that’s quite a list and it means that calculating TCO isn’t as straightforward as it first appears. However it’s important to get a TCO figure that is as accurate and comprehensive as possible. TCO is an important planning and budgeting tool for keeping tight control on the costs of your ERP implementation. The more inclusive your calculation the more useful it will be.