Total Cost of Ownership in Software Outsourcing

In 2024, it’s more critical than ever for businesses to understand the true financial implications of their software investments. Gartner, one of the world’s leading technology research and advisory companies, defines total cost of ownership (TCO) as a comprehensive assessment of IT or other costs across enterprise boundaries over time.  

Although TCO is an important aspect when calculating return on investment (ROI), it’s often overlooked. This happens because managers may not realise that new software isn’t just a one-time expense. They fail to recognise the cumulative costs incurred over time, which can lead to unexpected expenses down the road.  

It’s crucial for companies to quantify the financial impact of deploying a product across its life cycle by (1) planning ahead and (2) considering costs beyond the immediate purchase. Total software development costs, whether through outsourcing or in-sourcing, generally fall into three categories: start-up costs, operational costs, and retirement costs.  

1. Start-Up Costs  

Start-up costs vary depending on the type of software and the pricing model a business selects. Off-the-shelf software typically requires payment for licences or subscription fees, while custom-built solutions tend to have higher initial costs. Start-up expenses also include implementation costs such as installation, configuration, testing, and hardware upgrades, particularly for legacy systems. 

2. Operational Costs

These are the day-to-day costs involved in running and maintaining the software. They include scaling, backup, data migration, and compliance expenses, as well as licence management. Off-the-shelf software often incurs additional costs for customisation to meet a business’s unique needs.  

Even the best software won’t yield results if employees can’t use it effectively. Organisations must invest in training to ensure smooth adoption. There may also be extra costs when onboarding new staff, which can vary depending on the software’s pricing model. 

Ongoing maintenance and support costs also factor in. SaaS vendors often include basic support in their subscription fees, but more advanced maintenance may incur additional charges. These costs cover software updates, bug fixes, and potential expansion. 

3. Retirement Costs

TCO doesn’t end with start-up and operational expenses. There are costs involved in retiring or replacing software, including financial outlays for upgrades or cancellations and psychological costs such as reduced productivity and employee discomfort as they adapt to new systems. Retraining staff on new software also adds to the expense.  

Navigating TCO in Software Outsourcing 

Understanding these costs is essential for managers. First, it helps them plan ahead by quantifying the financial impact of software deployment beyond the immediate purchase. Second, it enables them to make more informed, long-term decisions when choosing a pricing model that aligns with both business needs and financial capabilities. 

For example, while custom software may have a higher initial cost, it can save money in the long run by preventing flexibility-related expenses as the business grows. Conversely, subscription-based software may offer a more cost-effective solution for businesses with simpler, shorter-term needs. 

Ultimately, conducting a TCO analysis is vital for businesses to determine their expected investment and budgeting requirements.  

Custom Software Development in 2024

Agile development companies like WorkingMouse understand the dynamic needs of growing start-ups and the complex requirements of large organisations when it comes to managing their software. Our custom software development services are built on iterative design principles—like sprints and ongoing client engagement—which allow businesses to maximise growth potential and explore new opportunities. 

While custom solutions come with risks, off-the-shelf options have their own challenges too. Neither option is as straightforward as it may seem, and TCO must be evaluated carefully to account for all aspects of software costs.