Wednesday, January 25, 2012

Calculating the Total Cost of Ownership

Total Cost of Ownership (TCO) is an important concept, especially when your organization is looking at an Enterprise Resource Planning (ERP) solution.  An effective ERP solution will incorporate every department and person in your organization.  If you are not considering all people, departments, and processes, then an ERP solution is going to be a tough fit and the challenges will likely be an uphill battle. 

You may say that we understand the All-In concept, but we only have the resources to do part of the job.  That is okay as long as your priorities are correct and you are planning a phased in approach.  Permanently ignoring an operation will create the weak link in a chain.  If that person or process is in your organization, then it needs to be included at some level.  Otherwise you are missing out on future savings.  Why is that person or process even in your organization if you intend on ignoring it.

The reason this is an important concept is the TCO calculation.  TCO is a realization that the costs associated with a purchase includes more than the initial price tag.  We see this in car pricing.  There is the sticker price which is starts the conversation off on a lie.  Most everyone knows that the manufacturer inflated this price based on the bubble they live in and what they want us to perceive as the value of the auto.  The dealers may have an invoice price, but they get so much on the backend that few outsiders really know what they are making.  You cannot keep a fancy dealership running on $300 gross profit from a car sale.  What we often forget when we smell that new-car scent they spray in the cars each morning is that there is the initial price paid for the car, then there is the ongoing maintenance, oil and gas, tires, wiper blades, insurance, time for service, etc.  That is the reason that car manufactures invest so much in advertising.  They are not selling a car, they are selling a lifestyle concept that includes this automobile.  All we really need to do is get from point A to point B.  It is how we get there that is what is being sold when you buy their automobile.

I am hoping you get the picture your consultant has helped you envision.  You purchase an ERP solution to integrate your entire organization.  Through a centralized data repository all parts of your organization work together more efficiently, thus reducing your operation costs and making you more profitable. 

Getting to this utopia will often necessitate a cultural shift in your organization.  This shift has to include all people on all levels of your organization.  It also means that you should not just look at the list price of an ERP solution.  There is so much more to be included, such as your trusted advisor.  This should be considered money well spent.   Why?  Because, even though you would like to save here, this is an investment, which yields a big return.  There is too much volatility in the market today.  It is best to know where you are headed so that you know when you get there and if you are off course.  We all suffer from what we do not know.  It is your advisors job to turn on the lights.  You may not need to address everything he/she brings up, but at least you will know what is out there.

Besides your consultant and the time/money equivalent of your team’s time investment and loss of productivity during the analysis and implementation, you will need to consider the initial purchase of the solution, installation, customization, migration from an existing system, management services, training, hardware changes, possible additional staff, increased communications bandwidth for Ecommerce, web, or a hosted (SAAS) solution and do not forget testing. 

This list is not all inclusive.  Each solution will have its variables, for example, there is energy consumption and cooling costs of hardware.  Some solutions have an initially lower price tag, but use more energy and create greater cooling costs over the useful life of the equipment.

The idea here is what you already know.  There is the acquisition cost and ongoing operating costs.  Above all the solution must meet the challenges and offer room to grow.  I have seen many instances where a solution was purchased only to need updates and upgrades from day one, because the system was not sized properly.  Usually, because if the system was sized properly it would have been to highly priced for their budget.  The result was frustration feeling that they were duped somehow.  When in reality they did not take the time to really look closely at what they wanted to accomplish and factor in the cost of operating and maintaining the system. 

A realistic view will not scare off someone trying to compete in today’s demanding market.  We love the new car smell, but are realistic in our expectations that it will take more than writing a check to solve our issues.  That is the difference between a tactical and strategic solution.  Which one generates the best Return on Investment (ROI)?

At Dolvin Consulting we take the time to understand your challenges and to make sure there is a good fit between your challenges and the available solutions.  Contact us today to see how we are different.

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