December 18, 2019
The Hidden Costs of Hosting – Part 3 – TCO
In part one
of this blog series, we discussed the hidden costs of owning an on-premises vs. a cloud-based business solution. In part two
we looked at the many benefits of moving to the cloud. Here, in the third and final part of our series, we’ll focus on total cost of ownership (TCO)—why it’s important and what’s being ignored when companies compare the costs of owning on-premises to cloud quality solutions.
Think about owning a car. A lot goes into it. There are insurance, repairs, and maintenance—those are obvious. But there are the hidden parts that we take for granted, too—learning to drive (training), getting that car on the road (implementation), and the personal time you spend on cleaning and keeping it nice (maintenance/upgrades)….to name a few.
Owning a business solution, in particular a quality management system, is a lot like owning a big ticket item like a car. It involves hidden and not-so-hidden costs that we seldom take into account when we consider the total cost of ownership
. So, as promised, let’s take a deep dive into TCO—it’s the coup de grace, the decisive finishing blow…and seems fitting for our closing blog in this series.
Total Cost of Ownership
The term “total cost of ownership” is wildly bandied about lately; for our purposes (enterprise quality management software systems), it is the sum of all direct and indirect costs incurred by the software. And it’s a critical part of any return on investment (ROI) calculation.
Unfortunately, TCO is often ignored—or at the very least is woefully underestimated—or worse, potentially impossible to calculate accurately (remember how we all like to use the acronym “SWAG?”)—when organizations assess and account for all the costs of owning a quality system and installing the software within their own IT infrastructure. The things you need to include in your TCO assessment (and I mean cradle to grave
: getting new quality software into production) are too numerous to list; however, I will provide you with an eye-opening partial list and trust that you see my point:
- Software. Off-the-shelf software usually has up-front costs, which include:
- The initial capital cost (CapEx) to purchase the software user licenses.
- The Annual Maintenance Agreement costs which are typically in the 15-20% range of the initial licensing cost (providing you with access to the vendor’s technical support, and the software upgrades - which include critical bug fixes).
- The initial CapEx to purchase the “other” software needed to support the business system (operating system, backup software, cybersecurity software, database licensing, etc.)
And don’t forget to include any finance charges.
- Hardware. The cost of servers, cabling, storage devices, racks, etc. to run the software, and other costs like backup and disaster recovery.
- You might hear the argument: “We already have hardware, servers, database licenses, backup and security systems, etc., so there is no cost for this.” I truly don’t believe this is accurate. There is a cost—as I described in Part 1.
- If a software package is placed on already existing IT infrastructure, a portion of the cost to own/maintain that IT infrastructure needs to be assigned to each software package/project using that IT infrastructure. Sorry, there is no “free lunch” in this scenario—ever.
- Implementation. The cost of setting up, configuring, and testing the software so it can be used in production. Applies to all software (cloud, or on-premises), although with custom software the configuration is usually part of development. Also includes the costs of setting up things like backups, disaster recovery, etc.
- Labor Costs. When calculating labor costs, don’t forget to calculate them based on the “loaded labor rate”—your employees incur additional costs such as taxes, benefits, training, supplies, all of which increase your actual employment costs. The fully-burdened labor cost is the full hourly cost to employ a worker for the hours they actually work, which includes wages and the “burden” of the additional costs.
- Data migration. The cost of moving data from the old to the new system, including data format changes. Sometimes this is not economically viable, so the old system is archived in a read-only mode, just in case it’s needed.
- User licenses. For off-the-shelf software, these typically come in only a few flavors: named users, simultaneous users, plant-wide, and employee-based. For the cloud, licenses are usually named. Does not apply to custom (“home-grown”) software.
- Training. The cost of training employees to use the software. Applies to all types of software. Note that in addition to end users, helpdesk and system admin employees must also be trained.
You can see that is a lot to ignore. But ignore is just exactly what many manufacturing organizations do. Why? Who can say for sure? But we can surmise that their reasons include things like: “business as usual” (or status quo), the assumed cost of doing business, change is difficult, and the path of least resistance. Or maybe just too many other priorities, and not enough time to complete the extensive research needed for a truly fair comparison? Maybe someone (usually in the IT department) is worried about losing their position; they won’t be needed any longer? Which is just flat-out wrong – because they can now spend their time on more critical needs, such as making sure the company’s cybersecurity defenses are as strong as possible.
To wrap it all up: I like to think of the comparison between an on-premises deployment and a SaaS solution as very simple—with just two basic rules:
- Rule #1 – SaaS is always LESS expensive for a company to operate in the long term
- Rule #2 – If someone claims SaaS is more expensive than on-premises solutions (in the long term), re-read Rule #1
Don’t believe me? Please do your own research (it really is amazing what you can find with a Google search—how did we survive before Google?) and I believe you will come to the same conclusion I have. To make it easier for you, here are a few TCO articles and calculators I found and saved:
So, perhaps for you and your organization it is time to shift gears and move from an on-premises quality solution to a cloud solution. The price is definitely down for cloud software, the technology is certainly solid and proven, and the time is right.
Thanks for joining us for this blog series. If you’d like to read (or re-read) either of the first two blogs, please select one below:
Take advantage of the technology at your fingertips today: contact one of our account managers (1.800.772.7978 or via our website
) for more information.