Cloud ERP Mistakes: Failure to Accurately Calculate TCO

In the case of cloud ERP systems, a failure to completely understand Total Cost of Ownership (TCO) has pushed many a solid company in the solvency rubbish bin. If a company doesn’t understand, or pay attention to cost pressures involved in cloud ERP TCO, chances are that company is leaving money on the table; or worse losing money without realizing until it comes to calculating its end of year P/L.

Cloud ERP contract terms and conditions may include many less obvious financial costs which can be missed entirely in the din of larger enterprise finance issues. However, with the advent of cloud ERP, and its dependency on connectivity further execrated by affiliate management costs, the need to pay a monthly piper can become more than one can bear. Consequently, we thought we’d take a look at the various cost categories involved in cloud ERP TCO that may be the cause of sleepless nights for your project manager.

1. Direct Impacts on TCO

Of all cloud ERP cost elements this category can be both the most obvious, and also the most troublesome due to the very fact of its position at the top of the cost food chain. Growth is endemic, and therefore introductions of additional systems costs over time tend to be assumed rather than calculated in detail simply because they are so, well, obvious.

Growth is endemic, and therefore introductions of additional systems costs over time tend to be assumed rather than calculated in detail

If your cloud project is operating on the basis of a traditional End User License Agreement (EULA), managers often fail to take time to read, and completely understand the fine print embedded within a cloud-mounted contract agreement. Many will also avoid paying attention to periodic announcements from systems providers regarding expanding cost elements, particularly if an agreement has been in effect for some time. This means that cloud ERP TCO can go up without a manager ever acknowledging that an incremental increase has occurred until the system’s TCO suddenly spikes quarterly; or God forbid, annually.

2. In-Direct impacts on TCO

Another cloud ERP TCO category worth mentioning involves indirect, yet necessary, operational elements associated with supporting or enhancing the efficiency of cloud ERP. These are often neglected based on the premise that cloud ERP is a “one-price-fits-all” service agreement.

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Consider infrastructure costs as an example; many managers fail to measure the cost of on-premise infrastructure enhancements such as extended wired or wireless structure build-outs, or expanded routing or gateway matrices when calculating cloud ERP TOC. However, the question here should be a fairly simple one, do the aforementioned hard expansions relate specifically to an ERP expansion effort? If so, these kinds of hard costs must be applied to the ERP TOC whether they specifically relate to the cloud platform itself or not, just to ensure enterprise management understands where ‘all’ the money goes.

3. Affiliated Impacts on TCO

In the same way that indirect systems costs can impact cloud ERP TOC, affiliate technical elements create the same type of financial effect. These costs can appear nearly anywhere within an overall infrastructure including the cloud infrastructure, its mounted SaaS components, right down to enterprise hardware elements or localized soft or middleware elements like the involvement of security or low-level utility systems. Again, if any of these cost items exist within the ERP project as a set of contiguous elements, these elements must be calculated as being intrinsic to overall cloud ERP TOC.

4. The Wages Of Cost Creep

Perhaps the most pervasive of all TOC impacts, ‘cost creep’ is regularly ignored by managers yet more often than not ends up being the most important negative impact on one’s cloud ERP TOC. Part of the problem is that most incremental SaaS cost hikes are typically small, usually costing anywhere from $1 to $10 per periodic payment segment. However, over time the cost category’s sheer lack of importance when compared with more weighty cost considerations can typically create a host of painful decision points for managers.