Buying a new IT system or upgrading an existing system can be a confusing proposition. Vendors may quote the price of equipment, software and installation but omit long-term costs that drive up the TCO (total cost of ownership) over the system's lifetime. You should also consider additional nonmonetary costs of ownership when comparing proposals .
Monetary Costs of Ownership
Long-term monetary costs of ownership include system maintenance and upgrades. The cost of telephone and on-site support should be factored into the TCO calculation. Often, vendors provide several levels of support and charge different rates for them. This is especially true in the case of open-source software , in which system integrators give away the software and make their profits by providing support and installation services.
Commercial software vendors often charge a per-user license fee. This fee is an ongoing, repetitive cost that is usually charged on an annual basis. It is not unusual for the licensing fee to rise each year, substantially increasing TCO over the software's lifetime.
The initial cost of training employees on the new system is usually included in a vendor's proposal. But ongoing training needs for employees that are hired in the future, as well as retraining workers after upgrades, are items that may be overlooked. Training costs are also subject to increases over time unless they are locked in at the time that a contract is signed.
While depreciation of equipment provides certain tax benefits, it is an actual cost that a company incurs as the value of a product that it purchased declines over time. In the world of IT, depreciation is often accelerated due to the rapid pace of innovation and new product introductions.
Customization of software is usually charged by the hour and can be a cost that escalates beyond initial expectations as a project proceeds. Often, these costs rise because new requirements are discovered in the course of the implementation; this is one reason why a company should put an enormous amount of attention to detail into defining a system's requirements before it signs a contract.
Nonmonetary Costs of Ownership
Implementing a new IT system usually disrupts business. In the early stages of a project, a vendor's consultants may consume employees' and managers' time as they strive to understand the implementation's requirements. During installation of equipment, workers may be distracted or temporarily displaced by contractors who are running cables, moving in new equipment and removing old equipment. This downtime and distraction can cause a significant loss of productivity and opportunity for the business.
Additional productivity is lost as workers struggle to familiarize themselves with the new system or spend time in training sessions.
Bugs inevitably appear in any new system, which further decreases productivity and leads to downtime. An improperly implemented system can have glitches that drag on for months or do not appear at all until long after it has been fully rolled out.
The TCO of any new system must be factored into any comparison of vendors' proposals. A classic example is the choice between a new wired network and a wireless network . The latter is easier to install and doesn't significantly disrupt work, but wireless networks are slower and less reliable than wired networks, which imposes a hidden productivity cost over the long term. It is vital that companies make such comparisons when they are considering several proposals for solving a business problem.