Total Cost of Ownership in Software Outsourcing

Gartner, one of the world’s lead­ing tech­nol­ogy re­search and ad­vi­sory com­pa­nies, de­fines to­tal cost of own­er­ship (TCO) as a com­pre­hen­sive as­sess­ment of in­for­ma­tion tech­nol­ogy (IT) or other costs across en­ter­prise bound­aries over time.

While TCO is an im­por­tant as­pect to be con­sid­ered for re­turn on in­vest­ment (ROI) cal­cu­la­tions, it is of­ten not con­sid­ered in ROI eval­u­a­tions. This is be­cause man­agers fail to rec­og­nize that new soft­ware is rarely a one-time cost. They don’t ac­knowl­edge the el­e­ments of the cu­mu­la­tive ex­pense that could be in­curred over a pe­riod of time, lead­ing to ‘sur­prise’ costs along the way.

Therefore, it is es­sen­tial for com­pa­nies to quan­tify the fi­nan­cial im­pact of de­ploy­ing a prod­uct through its life cy­cle by (1) plan­ning ahead, and (2) con­sid­er­ing costs be­yond the im­me­di­ate hard pur­chase. Total soft­ware de­vel­op­ment costs, whether de­vel­op­ment oc­curs through soft­ware out­sourc­ing or in-sourc­ing, can be broadly di­vided into three cat­e­gories: startup costs, op­er­a­tional costs, and re­tire­ment costs.

1. Start-Up Costs

Start-up costs vary on both the type of the soft­ware and the pric­ing model that a busi­ness chooses. For off-the-shelf a busi­ness needs to shell out soft­ware li­cense and sub­scrip­tion fees, while for cus­tom-made soft­ware such costs are higher. Start-up costs also in­clude im­ple­men­ta­tion costs such as in­stal­la­tion and set-up costs, costs in­volved in test­ing, con­fig­ur­ing the soft­ware to ac­com­mo­date the busi­ness processes, and even hard­ware costs for legacy soft­ware.

2. Operational Costs

These are the ‘in-use’ costs which are in­volved in the day to day run­ning and main­te­nance of the soft­ware to en­sure smooth func­tion­ing. They com­prise of scal­ing costs, back-up and data mi­gra­tion costs, as well as com­pli­ance and li­cense track­ing costs. Off-the-shelf soft­ware of­ten re­quires over­head ex­penses to­wards its cus­tomiza­tion to en­sure that it caters to the busi­ness’ re­quire­ments.

Even the most so­phis­ti­cated soft­ware would fail to yield busi­ness re­sults if the com­pa­ny’s em­ploy­ees are un­able to use it. Therefore, an or­ga­ni­za­tion needs to in­vest to­wards em­ployee train­ing to en­sure that they are able to use it smoothly. Further, there may be ad­di­tional costs when new em­ploy­ees are added, and this cost de­pends largely on the soft­ware pric­ing model.

Another set in­volves the main­te­nance and sup­port costs which could be charged for on­go­ing up­dates, bugs, is­sues, and costs for soft­ware flex­i­bil­ity and ex­pan­sion. SaaS ven­dors of­ten bun­dle the ba­sic sup­port charges into their sub­scrip­tion model, how­ever, or­ga­ni­za­tions end up pay­ing ex­tra for more so­phis­ti­cated main­te­nance is­sues.

3. Retirement Costs

The to­tal cost of own­er­ship is not lim­ited to start-up and op­er­a­tional costs, there are also fi­nan­cial and psy­cho­log­i­cal costs in­volved in switch­ing from one sys­tem to an­other. The fi­nan­cial costs per­tain to soft­ware re­place­ment, up­grade, and even can­cel­la­tion, while the psy­cho­log­i­cal costs per­tain to the po­ten­tially re­duced em­ployee pro­duc­tiv­ity when ac­com­mo­dat­ing to a new soft­ware, em­ployee dis­com­fort etc. Moreover, there may be high costs in­volved in em­ployee train­ing for the new soft­ware.

Navigating Through Total Cost of Ownership in Software Outsourcing

The un­der­stand­ing of these costs has some im­por­tant im­pli­ca­tions for man­agers. Firstly, it can help them quan­tify the fi­nan­cial im­pact of de­ploy­ing a soft­ware by plan­ning ahead, and con­sid­er­ing costs be­yond the im­me­di­ate hard pur­chase.

Secondly, it can en­able them to make more in­formed and long-term de­ci­sions when choos­ing a pric­ing model, such that it best meets their busi­ness needs as well as their fi­nan­cial ca­pa­bil­i­ties. Such a de­ci­sion can be made based on the busi­ness’ flex­i­bil­ity, its long-term growth tra­jec­tory, its past ex­pe­ri­ence, as well as an un­der­stand­ing of po­ten­tial dy­namic re­quire­ments.

For ex­am­ple, cus­tom-made soft­ware may be cost­lier at the on­set, but could also pre­vent flex­i­bil­ity-re­lated costs in the fu­ture, when the firm grows in size. Similarly, an or­gan­i­sa­tion can de­cide whether own­ing a soft­ware would cost less and be more prof­itable based on their long-term growth goals. Alternatively, they can ex­plore cost-cut­ting mea­sures if the busi­ness re­quire­ments favour a sub­scrip­tion-based soft­ware. Therefore, it is im­per­a­tive for busi­nesses to con­duct a TCO analy­sis to gauge the ex­pected in­vest­ment and bud­get­ing re­quire­ments.

Custom Software Development

Agile soft­ware de­vel­op­ment com­pa­nies such as WorkingMouse, un­der­stand the dy­namic needs that come with the growth tra­jec­tory of start-ups, as well as the com­plex re­quire­ments of large busi­nesses when it comes to hav­ing a con­trol of their soft­ware. Our cus­tom soft­ware de­vel­op­ment ser­vices is grounded on it­er­a­tive de­sign prin­ci­ples, such as sprints and reg­u­lar en­gage­ment with clients, and al­lows busi­nesses to max­imise their growth po­ten­tial and ex­plore new av­enues.

While cus­tom so­lu­tions in­cur some risks, there is also a set of risks as­so­ci­ated with off-the-shelf so­lu­tions. Moreover, in terms of costs, nei­ther is as sim­ple as is com­monly per­ceived, and there are sev­eral di­men­sions to the to­tal cost of own­er­ship.

If you want to read more on how you can man­age your soft­ware costs, check out Eban’s ar­ti­cle How to Accurately Estimate The Cost of Software****.


David Burkett

Growth en­thu­si­ast and res­i­dent pom

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