Today’s fast-changing business climate is one that prizes outcomes (and the innovations needed to achieve them) above all else. This has, in turn, created new opportunities for IT and procurement departments to rethink traditional approaches and jointly lead a shift towards results-based evaluations of enterprise technology. In this new approach, standard technology requirements must be placed in the context of desired business results or outcomes. For many organizations this will mean a shift away from the concept of evaluating and optimizing the cost and capabilities of a technology, and towards solutions that will help generate the greatest business value. This does not mean that classic IT considerations like internal governance, integration, and price should be bypassed. To the contrary, this new approach builds upon the best practices of the past while creating a new total cost of ownership (“TCO”) model that estimates expected results and favors the solutions most likely to deliver them.
The TCO model is an evaluation methodology used to determine the value and cost of an investment. It is frequently used by enterprises for their IT investments. The principle behind a TCO analysis is to incorporate all of the direct and indirect costs associated with the purchase and maintenance of the item or service over its lifecycle of usage to understand and calculate a “total” cost. The model is also used to capture the full range of benefits that an investment can generate to estimate a “total value.” The TCO approach has become a standard way for solution selection teams to evaluate supplier bids and award contracts and has become a useful way to discern the different costs between cloud and installed software contracts.
From a cost standpoint, it is important to incorporate all of the direct and indirect costs generated by an IT investment into the model. These costs include, but are not limited to:
- Set-up costs like standard installation and set-up fees (for cloud) or internal staff and third-party systems integration and customization expenses, as well as supporting hardware technology (e.g., servers, storage, security, etc.) for installed systems
- Access costs like perpetual licenses and user subscription fees
- Usage costs like transaction fees or other activity or volume-based fees
- Ongoing maintenance costs (for installed) like help desks, software maintenance fees, hardware upkeep, IT staff time, and all associated upgrade expenses
When comparing the TCO of a cloud solution to one that is installed, it is important to understand that the cost inputs of the two methods are markedly different and that the analysis is not “apples to apples.” At the core, installed software investments tend to be made and accounted for as capital expenditures that are heavily front-loaded and coupled with ongoing internal support costs. In comparison, cloud solution investments tend to be made and accounted for as operating expenses that are more predictable over the entire subscription period.
Final Thoughts
Performing a TCO analysis is also relevant when comparing the bids of competing cloud solution providers because the types of fees charged (and the associated dollar amounts) for comparable solutions can vary widely. Buyers cannot simply compare subscriber fees because some cloud providers charge for configuration services and access to additional templates and forms that other providers include at no charge. Additionally, subscriber fees charged by some providers are tiered based upon user access or privileges while others offer a standard fee per user. Finally some solution providers charge activity-based transaction fees to the buyers and/or third-party users of the system while others do not.
