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written on 04.05.2022

Total Cost of Ownership - eine nicht zu unterschätzende Kennzahl bei der Softwareeinführung in Betrieben.

When introducing new software into a company, often only the implementation and licence costs are considered. However, it is also important to include the indirect costs. The so-called "Total Cost of Ownership" (TCO) key figure indicates the total costs incurred for the use of the software and should therefore be taken into account in every decision.

The importance of the total cost of ownership (TCO) has moved more than ever into the focus of corporate decision-makers in times of increasingly tight budgets and tighter IT departments. The successful introduction of a new software solution requires a well-founded TCO analysis in order to make the financial consequences of the decision transparent and rule out risks. But what exactly is TCO?

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Total Cost of Ownership – what is that?

The total cost of ownership, or TCO for short, is a key figure that indicates how high the total costs are for the use of a certain software over its entire life cycle. This takes into account both the direct costs of purchasing and implementing the software as well as all indirect costs incurred through the use of the software.

TCO is therefore an important factor when deciding in favour of or against a particular software solution. This is because the initial costs for the acquisition and implementation of a new software solution are often only a fraction of the total costs that arise over time. The TCO should therefore always be taken into account when evaluating software solutions.

The importance of TCO in the introduction of software in industrial companies.

TCO indicates how high the total costs for the use of software are over its entire life cycle. In addition to licence and maintenance costs, this also includes indirect costs such as training and implementation costs as well as costs for unproductive times due to system failures or errors, and costs due to additional IT projects or process adjustments.

You can ask yourself the following questions to get an initial impression of the indirect costs:

  • How much training is required for each user who will use the software?
  • What do the support services cost?
  • Imagine the processes in your company are changing:
    • Can changes be made in-house? Or are external consultants required?
    • Can the software be easily customised and configured? What does the settings screen look like?
    • Can the departments themselves act and customise their software? Or is the IT department required for every change?
    • Does customisation require a lot of programming? Or is it a no-code solution?
  • What costs will the company incur after the initial outlay or implementation?

Many companies underestimate the importance of TCO when deciding on a particular software solution. This can involve considerable sums – the TCO for an average business software is many times higher than the licence. It can therefore be worthwhile to invest “more” in the licence costs – and ultimately save on indirect costs.

What is the TCO made up of?

The following costs can be incurred by software, for example:

  • Licence fees
  • Implementation costs
  • Training costs
  • Support services
  • Maintenance costs
  • Hardware costs, infrastructure costs
  • Follow-up costs due to software customisations
  • Additional costs due to additions
  • Indirect costs due to supplementary IT projects

The TCO analysis is a valuable tool for determining the true cost of a software solution. A detailed TCO analysis can provide information on which software solution is best suited and to what extent it should be implemented. TCO is therefore an important basis for decision-making when introducing software in companies.

“The sum of all costs incurred over the entire useful life of a software solution is known as the total cost of ownership (TCO).”

Factors that influence the TCO:

Many factors have an impact on the total cost of ownership. On the one hand, the characteristics of the company, such as its size, number of employees, existing structures and much more.

On the other hand, there are the features and flexibility of the software – but which features should you look out for here? We’ll look at a few of them here:

1. Roll-out capability: Can the software be rolled out to other areas and locations with little effort?

An important feature is the roll-out capability of the software. Here, it pays to take a look at the big picture and think long-term.

If you want to use the software solution in other areas or branches, for example, new questions arise:

  • Can additional languages be added to the software? Can a database be used for this?
  • Can the software also be used in other areas and departments?
  • How time-consuming is it to create new users?
  • Can clients be managed in one system with separate data storage?
  • Is it possible to integrate partners and suppliers into the software at a later date?
  • Can analyses be made across several locations/areas?

2. Adaptability of the software: Does the software offer enough flexibility?

Flexibility at a technical level must also be taken into account. This often involves evaluating how complex process management and adjustments are. Flexibility can be clarified with two simple questions:

  1. Firstly: Is it even possible (to make the adjustments independently)?
  2. Secondly: How time-consuming is it (to make the adjustments independently)?

The second point in particular is highly relevant. In many companies, changes are otherwise not made proactively, but only when absolutely necessary.

Adjustments can quickly become necessary. For example, if the name of one of the products changes: How time-consuming is it to set up this change in the system? Or is there a new legal requirement, for example: how quickly can the authorisations for access, information views or approval processes be changed?

Flexibility briefly summarised: “Does the software adapt to the processes or do the processes adapt to the software?”

This is where no-code technology comes into play. No code solutions can be configured without any programming effort or technical background knowledge, allowing changes to master data, processes, authorisations and much more to be made quickly and easily.

In our blog article „No-Code App as a success factor for agile process optimisation in industry.“ you can read more about the principle of no-code technology.

3. Compatibility with existing systems: Can the software be integrated into the existing system landscape?

Another important feature of the software is its compatibility with existing systems. Here we check whether data can be easily imported or exported from the system. And the software’s ability to interface with existing systems (e.g. the ERP system).

Because if information has to be transferred manually to other systems, it becomes very time-consuming and expensive.

High-TCO vs. Low-TCO. Examples of software applications in comparison: SAP and Testify.

If you compare different software applications, you can see that the TCO can vary widely.

The difference in TCO becomes clear when you take a closer look at the following two software solutions:

SAP (High-TCO-Example) Testify (Low-TCO-Example)
How many resources need to be invested in process adjustments? A lot of expertise for adapting processes in the solution. Very costly and time-consuming, as external consulting resources and/or internal resources are tied up In-house key users in specialised departments can configure the software. No programming knowledge required.
Flexibility: Who adapts to whom? Software processes are firmly anchored in companies. The processes are based on the rigid, existing processes in the software. High flexibility. The tool can be customised to your own processes without a great deal of effort. And without the need for a major IT project.

The best of both worlds.

Most companies use ERP software solutions such as SAP in their value-adding business processes, which are firmly anchored in the company’s processes. Employees must be able to work intuitively with the software without lengthy training, especially at an operational level. Complex software solutions are often not suitable for this. Nevertheless, companies do not have to be satisfied with inflexible processes and high customisation costs.

In order to reduce indirect costs and make processes more adaptable and flexible, companies can supplement their system landscape with adaptable low-TCO software such as Testify.

This then looks like this: Instead of making a lot of adjustments in the primary SAP system, the data is captured with Testify. Interfaces can be used to automatically feed the recorded data into the primary system.

The data sovereignty lies with SAP, but the data is captured via Testify. Testify therefore fits perfectly into the IT landscape like a piece of a puzzle – and you can utilise the advantages of both.

Conclusion

The total cost of ownership is an important key figure when evaluating software solutions. This is because the initial costs for the acquisition and implementation of a new software solution are often only a fraction of the total costs that arise over time. The TCO should therefore always be taken into account when selecting a new software solution.

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Written by
Melanie Skola

Melanie has been working for us as a Content Creator since February 2021.

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