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Understanding the total cost of ownership

The software industry has managed to create a wide variety of business models that inevitably create confusion when deciding on the most appropriate solution. These range from open source, cloud computing, boxed & turnkey solutions, sector specific and bespoke solutions to name but a few.

Software as a Service model

total cost of ownershipStart up businesses often select pay as you go solution, often referred to pre-seat licenses, that are attractive as they require minimal initial investment, however in the longer term these can become increasing expensive to maintain. A common issue with using these types of solutions is that the business becomes tied in to the software and migrating to another solution can seem daunting. This is often exacerbated as the business often needs to address the increased cost at the same time as they are growing and time becomes a critical element of the decision making process.

So what should one consider when selecting a solution that will become business critical? The first issue should be to understand the total cost of ownership and this is where many businesses don’t take into consideration all the costs (either direct or indirect). The above scenario is a prime example as businesses using Software as a Service (SaaS) might initially be attracted to the initial low costs whilst the number of users remains minimal.

Example of per seat / per month costs:

2 x users @ £ 45.00 per month = £ 1,080 per annum
5 x users @ £ 45.00 per month = £ 2,700 per annum
10 x users @ £ 45.00 per month = £ 5,400 per annum

Furthermore businesses need to take into account other costs that include:

Staff training
Connectivity costs (broadband, etc.,)
Hardware (computers, etc.,)
Business interruption (either as a result of downtime / loss of connectivity)
Cost of data backup / continuity
Cost of data migration

You see that even with a relatively simple example, making an informed decision becomes increasingly difficult and the costs associated with getting it wrong can be significant and not restricted to the license itself.

I recently met a client that started a business four years ago and has enjoyed a really successful period of growth. Although the majority of systems they had in place used a SaaS model they had served their purpose during the initial start up phase of the business, keeping costs under control, enabling them to focus on other areas of the business. The costs are now becoming inhibitive and they were looking for a more sophisticated approach to addressing a variety of issues that would help them improve efficiency and increase profit margins by enabling them to drive business towards the most profitable gateway. They had considered using another more mature SaaS but this introduced a slightly different business model in that they charged a minimal set-up fee, but then charged a percentage of turnover. Sounds attractive, but for a business running on competitive margins and turning over a not insignificant amount of money this represented a great reduction to the bottom line.

Cloud computing

Cloud computing is currently the hot topic with all sorts of businesses talking about it. Even business support organisations like The FD Centre are using it in their marketing and accountants like Bishop Fleming (in Exeter) are starting to provide on-line accounts solutions for SME clients. I remain skeptical about the term cloud computing as I think it lacks substance. Certainly Google have created a collective set of tools that seems to fit the definition of cloud computing (Google Products), but in most cases cloud computing is another name for services delivered via the web. Perhaps the games industry are the most likely to achieve something close to what I would call cloud computing, in terms of shared resources creating synergy through a number of collective hardware resources (see onlive).

Many of the same costs associated with SaaS need to be taken into account when considering cloud computer. It is interesting to note that corporates seem particularly interested in this concept and I know a number of senior IT Directors working within the FTSE 500 that are actively investigating it.

Open source

firefoxOpen source solutions are becoming more attractive and the success of openoffice.org is a prime example of where it makes for a compelling solution. Openoffice has challenged Microsoft’s domination of the office based solutions that encompass word processing, spreadsheets and presentations and is enjoying an rapidly expanding market share. Open source projects like Openoffice and Mozilla the people behind Firefox (web browser) and Thunderbird (email client) are really good advocates for the open source movement. Any business investigating a potential solution should always investigate the open source options as there are some great projects out there like SugarCRM, Zen Cart and even WordPress.

Open source is extremely compelling as many of the solutions don’t charge for licenses and are marketing as free, but you need to take into consideration a number of issues:

Set-up fees (usually requires a system administrator or technically able person to configure the software)
Staff training

Although there are other costs that should be considered the biggest single factor you need investigate is the level of support provided in terms of continued development and technical support available. Check out support forums, blogs and how often new versions are released. RedHat offers a free operating system (Fedora) but charge for their corporate version (RedHat); similarly Sun Microsystems initially provided Openoffice free of charge but charged for StarOffice (Sun Microsystems are now owned by Oracle).

Bespoke solutions

I know you are expecting me to extol the virtues of bespoke solutions bearing in mind we are a bespoke software provider but it isn’t right for everyone!

Traditionally, corporates invest in bespoke solutions as it makes economic sense buying 10,000 licenses for an international business would have a huge cost. Bespoke software enabled large businesses to develop systems that met their needs and represented real value for money. Certainly in the nineties I worked predominantly in the blue chip and corporate environments, developing intranet / extranet systems for the likes of ICI, NEC, East Indian Dock Company and The New Millennium Experience (The Greenwich Dome).

In the last 10 years however this has changed and more and more SMEs are investing in bespoke solutions that can make a real difference to their businesses. The cost of software development has fallen and the adoption of web based solutions has made bespoke solutions far more accessible to smaller businesses.

But, before you considering a bespoke solution make sure you understand what is available either as an off-the-shelf solution (see above options) and understand what each option provides in terms of meeting your businesses needs.

Understanding the total cost of ownership is a little more complex, but consider these at a bare minimum:

Fees for the business analysis
Initial development fees
Maintenance fees
Additional fees (for development / alterations)
Staff training

Some companies charge maintenance fees of around 20% per annum, others charge on a pay as you go basis, but there are a wide variety of business models used throughout the industry so make sure you understand them before making a final decision.

Lastly, ask the provider what happens if they go out of business or you want to use a third party to maintain the system as this is the sort of question many forget to ask until it is too late!

Conclusion

In writing this article I have only covered some of the basics, but you can see there are a wide variety of options to consider and plenty of pitfalls to avoid. It is important for you to carry out due diligence before committing to a specific solution or provider and I would recommend you speak to your local Business Link as they will often be able to point you in the right direction, but otherwise make sure you consider not only the immediate, but the long term costs of using the software.

If you would like to have a chat about a project I would of course be delighted to discuss your business requirements and will often suggest looking at alternatives first if I feel they are appropriate.

Date: 19/03/2010

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