When introducing new software into a company, often only the implementation and license 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 become more important than ever for corporate decision-makers in times of tighter budgets and tighter IT departments. The successful introduction of a new software solution requires a well-founded TCO analysis in order to transparently present the financial consequences of the decision and rule out risks. But what exactly is TCO?
Total Cost of Ownership (TCO) – what is it?
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 for 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 total cost of ownership when introducing software in industrial companies
TCO indicates the total cost of using software over its entire life cycle. In addition to license 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 the company are changing:
- Can changes be made in-house? Or are external consultants required?
- Can the software be easily customized and configured? What does the settings screen look like?
- Can the specialist departments act on their own and adapt their software? Or is the IT department needed for every change?
- Is there a high programming effort for customizations? 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 license. It can therefore be worthwhile to invest “more” in the license costs – and ultimately save on indirect costs.
What is the TCO made up of?
The following costs can be incurred by software, for example:
- License fees
- Implementation costs
- Training costs
- Support services
- Maintenance costs
- Hardware costs, infrastructure costs
- Follow-up costs due to software adjustments
- Additional costs due to supplements
- 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 total cost of ownership:
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 go into 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 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 evaluations 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:
- Firstly: Is it even possible (to make the adjustments independently)?
- Secondly, how time-consuming is it (to make the adjustments yourself)?
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 authorizations for access, information views or approval processes be changed?
Flexibility in a nutshell: “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, authorizations and much more to be made quickly and easily.
You can read more about the principle of no-code technology in our blog article “No-code app as a success factor for agile process optimization”.
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 to adapt processes in the solution. Very cost and effort-intensive, as external consulting resources and/or internal resources are tied up | In-house key users in specialist 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 individually tailored 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 adaptation costs.
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 many 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 collected via Testify. Testify therefore fits perfectly into the IT landscape like a piece of a puzzle – and you can benefit from 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.
