How to calculate TCO for enterprise software

When organizations buy a shiny new piece of software, attention is typically focused on the benefits: streamlined business processes, improved productivity, automation, better security, faster time-to-market, digital transformation.

The other side of the cost/benefit equation — what the software will cost the organization, and not just sticker price — may not be as captivating when it comes to achieving approval for a software purchase, but it’s just as vital in determining the expected return on any enterprise software investment. After all, if you can’t accurately forecast or calculate the total cost of a software implementation over the full lifecycle of the product, you have no foundation on which to make sound IT decisions, purchasing or otherwise.

What is TCO and why is it important?

Total cost of ownership (TCO) is an estimate of an organization’s overall expected spend to purchase, configure, install, use, monitor, maintain, optimize, and retire a product or service.

A full-blown TCO analysis can be complicated and time consuming. But if you’re a department head pitching a major software expenditure to a CIO, if you’re a CIO with a limited budget trying to choose between competing projects, or you’re a CIO trying to sell a software-driven strategic initiative to the CEO or the board of directors, a strong TCO analysis is a must.

Beyond simply providing an accurate and predictable analysis of costs over time, digging into TCO can provide other benefits. It can help uncover hidden costs that could come back to bite you down the road. For example, if you plan to run the application for five-plus years, but the servers you plan to run it on are approaching end of life and will need to replaced in two to three years, you’re going to need to account for that.

A TCO review can also help make sure a software implementation performs as expected and delivers the benefits you were looking for. A TCO analysis forces you to think about things such as data migration, employee training, and process re-engineering.