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The Trouble with TCO

by Joshua Greenbaum | insiderPROFILES

October 1, 2011

The one overarching topic that looms over SAP, its customers, and its competitors centers around the never-ending debate over the total cost of ownership (TCO) of enterprise software. Read this article to discover how knowing your company's IT-IQ (information technology intelligence quotient) and calculating its buying power can help make sense of TCO.

The one overarching topic that looms over every discussion I have with SAP, its customers, and its competitors centers around the never-ending debate over the total cost of ownership (TCO) of enterprise software. Even more genuinely interesting topics, such as SAP HANA, mobile deployment, and new sustainability software, all eventually run aground on the issue of TCO.

Even before the economic recession, the total cost of big software was an ever-present issue that lurked behind the scenes. Now, with recovery sputtering, the interplay between innovation and TCO has never been more visible, more important, or more difficult to sort out.

There is a way to make sense of TCO, but it involves some work — and the onus of the job rests on the shoulders of SAP customers and their end users.

Settling the TCO Debate

The problem with TCO is that it gets more complicated with every twist and turn in the market. Take software-as-a-service (SaaS): The SaaS market’s subscription pricing and ability to shift spending from the capital expense to the operating expense side of the balance sheet have given IT buyers a skewed perspective on what the TCO of big enterprise software should be. Many IT decision makers are contemplating whether they can toss their preconceived notions of TCO — born from the pain of buying and deploying generations of overly complex enterprise systems — out the window in favor of the new-fangled SaaS subscription-based, “opex” model.

And that’s just the tip of the confusing TCO iceberg: total cost is hard to define, harder to measure, and even harder to compare from one installation to another, much less from one vendor’s product set to another. However, it’s not impossible. There is no shortage of numbers you can collect on the way toward building a TCO model, and there are some well-known “big-bucket” costs that go into most TCO calculations: implementation, licensing, maintenance, hardware, personnel, operations, training, upgrades, and improvements, for example. It’s a hodge-podge of costs that can be tricky to calculate, but most companies have the ability, if not the will, to collect these numbers and jerry-rig them into a TCO model. 

Tricky Factors to Consider When Calculating TCO

With that said, many of these numbers and factors mitigate against an easy, breezy TCO calculation. Number one on that list is what I call IT-IQ, as in information technology intelligence quotient. When you dig under the covers and look at how companies attack the big-bucket costs, the issue of experience and maturity continually presents itself. Hence the term IT-IQ: the higher the IT-IQ, the better an organization can understand the complexity and scope of a big ERP implementation and manage it in an optimal way.

This may sound simple at first, but calculating IT-IQ includes answering questions such as: How many implementations has the company performed before? And does the company know how to gather requirements, engage stakeholders, manage complex processes, pick the right partners, and budget and staff the project appropriately? The only people who think calculating these factors is a no-brainer are the ones who haven’t tried to do it.

The SAP world has its own special questions to consider as well: Is the IT department already knowledgeable in the details of core technologies like SAP Basis, SAP NetWeaver, SAP GUI, SAP Solution Manager, and a dozen other technologies and products? How about training or business process management? Does the company have an SAP Customer Center of Expertise or even know what one is? In terms of factors that determine SAP-specific IT-IQ, the list goes on and on.

Another tricky factor to calculate is buying power. For example, if you’re in the SAP Premier Customer Network, the crème de la crème of the SAP customer list, your ability to command a deep discount and realize economies of scale is significantly different from that of the average customer. Again, this buying power issue becomes another factor militating against an easy TCO calculation.

Even if you could surmount the IT-IQ and buying power problems, the issue of computing relative TCO is even more complex. The first level of complexity revolves around just comparing, say, two SAP Business Suite implementations. Trying to compare a totally “greenfield” implementation of SAP Business Suite to a legacy replacement project that swapped out 25 different ERP systems would be seriously challenging. The same goes for trying to compare a single global instance of SAP Business Suite to a highly localized, multi-instance system. You might as well be comparing SAP Business Suite to a space shuttle program.

And that’s not all. Computing relative TCO gets even more convoluted when you look at the problem of comparing SAP Business Suite to Oracle E-Business Suite — the differences between the two products are so vast that any one-to-one comparison would be rife with asterisks, footnotes, and other caveats. It may make you wonder if it’s even worth bothering.

The Solution? Collect and Share Data on Real Customer Costs

Actually, it is worth bothering. Against the bleak picture I just painted, there’s more than a modicum of hope for arriving at a better measure of TCO. And that’s where SAP customers and their user base come in. Too many companies simply don’t collect data on the full life cycle of their enterprise software deployments, and that worst practice has to stop now.

It’s this lack of truly comprehensive data on real customer costs that renders the extremely difficult TCO issue fundamentally impossible. What everyone in the industry needs — SAP, its customers, competitors, and partners — is real cost information from the source in order to even start thinking about building the ultimate TCO model.

This means collecting data on the easy factors as well as the tricky factors, like IT-IQ. It also means collaborating across your industry and geography to understand which TCO factors are most germane to your particular slice of the market. And it means working with SAP and your other vendors to make sure your understanding of TCO dovetails well with the vendors’ understanding of the issue.

If companies in major vertical industries and geographies started collecting and sharing this data, some beautiful things could happen: companies would begin to have a better idea of their internal costs and be able to compare them with their peers. And SAP and its competitors would see where their own TCO models are strong and where they are weak, and make adjustments accordingly.

And, perhaps most importantly, the accumulated weight of this data would put more pressure on everyone — SAP, you, and your systems integrator — to justify costs and explain the difference in the value customers get from their enterprise software. Once that happens, we can begin to set TCO aside and get back to more interesting and exciting things, like in-memory database technology and mobility solutions. Wouldn’t that be nice?

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