It is wise to sum up the TCO (Total Cost of Ownership) whenever an organization goes for any purchase and installation. TCO provides a clear picture of the total cost involved and helps in taking right financial decisions. ERP implementation and running of the software system demands huge capital investment and therefore TCO in this case plays a significant role in determining the final profit margin. TCO involves the direct and indirect costs during purchase including the hidden and annual maintenance cost. TCO is the best tool to determine the ROI (Return on Investment) of any new purchase or implementation. Although, TCO analysis is not new but presently it has found wide application in the IT industry.
TCO can be designated as a strategic tool to identify the major cost benefits of the ERP implementation during its entire life cycle. It helps to maintain the cost during the life cycle at the same time assessing its business value. TCO of ERP depends upon the expenses incurred on hardware, software, training, implementation, data migration and annual maintenance. Various hidden costs and employee performance also contribute to the TCO. Hidden costs contribute almost 20% of the TCO and many organizations make a blunder ignoring these costs.
Most of the ERP systems constitute of core features, but addition of special add-ons for business requirements increases the number of end users increasing the TCO. Special features of ERP also raise the TCO. ERP packages supporting different languages, currencies and e-business raise the TCO significantly. More the complexity in ERP features more is the TCO.
Hardware expenses: Although expenses on hardware comprise the major portion of TCO, the silver lining is that it can be estimated. Huge expenses are incurred in procuring a number of workstations, discarding the old infrastructure, installation of servers, equipments for integration and system software.
Expenses on integration and testing: This forms one of the indirect costs and seems never ending. Expenses shoot up as integration is carried on during implementation followed by testing. Both the buyer and seller participate in different phases of testing the software modules gradually increasing the TCO.
Expenses on training: About 13-17% of the TCO can be attributed in training the in house staff. Again, the cost increases with the extension of time. Organizations having pre-trained staff can reduce these expenses to some extent. Moreover, slow performance of the untrained or newly trained staff also raises the TCO.
Expenses on consultation: This is one of the indirect costs and is often tough to estimate. Costs on consultation can be huge depending on the situation and organizational requirements. Organizations spending $3-4 million often have to spend $8-9 million on consultation. This can be minimized through remote consultancy but some organizations located in remote areas may require on site consultants.
Expenses related to data migration and data conversion: This also contributes significantly to the TCO as the process demands a high level of accuracy. Sorting and migration of data should be carried out with high precision generating error free reports.