21 cost elements to include in your ERP TCO calculation
The modern definition of total cost of ownership (TCO) was established in the mid-80’s by Gartner Research, although prior to this event, the concepts of identifying, calculating and measuring the cost of known operational expenses had been applied since the industrial age. However, the emergence of new technologies, primarily in the form of computing and software systems, required a different slant on previously accepted cost accounting methods. Consequently, in the ERP market, the Gartner definition became the ultimate rule rather than the exception.
That said, and just to refresh the reader’s mind, here is how Gartner formally defines TCO “For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.”
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Now, there is a school of thought which excludes the software acquisition costs in ERP TCO calculations. Some of you may be about to jump up and yell, “how can the software cost not be a vital element of TCO?”. Well it is and it isn’t, depending on who’s doing the measuring. Some financial folks consider pre-operational software and license purchases to be ‘capital expenses’ (CAPEX) and, therefore not necessarily related to the calculation of active ‘after purchase’ operational costs. At the end of the day, adding or discarding these cost elements within an ERP TCO analysis typically comes down to the particular pricing model employed or the desires of an enterprise’s COO or CFO.
Now that we’ve put paid to fuzzy accounting concepts associated with what is, and isn’t a valid calculation, let's look at some of the common elements which should be included in an ERP TCO:
Networking hardware and software costs
Server hardware and software costs
Workstation hardware and software costs
Installation and integration of hardware and software costs
Data migration costs
Risk management; i.e. potential vulnerabilities, upgrade availability, patch and future license management etc.
Infrastructure enhancement costs
Power costs, i.e. affiliate equipment, climate systems, backup power systems
Quality assurance and testing costs
Downtime and outage costs
Reduced productivity costs, i.e. acclimatization to system, diminished money-making ability
Security including potential breaches, loss of brand reputation, recovery and future prevention
Backup systems management and recovery costs
Process auditing costs, i.e. internal and external
Process re-engineering costs
Stand-in and special personnel costs
Project management costs
Future upgrade or scalability expenses
Legacy platform decommissioning costs
All of these elements, along with virtually every other hidden element that costs more than the price of a paper clip, should be applied to an ERP TCO in order to understand where one’s budget is going. Cost, not revenue, is often the primary gating issue when it comes down to executing a successful ERP project.
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