| So You Can Budget, Compare and Save.We all | | | | This is very important and sometimes tricky |
| have struggled to find exactly how much | | | | variable in finding out the TCO. First of all |
| custom software applications cost to build, | | | | you need to dollarize the benefits of the |
| maintain, and enhance over their life. | | | | application you are building. That means |
| Accounting needs to know so they can budget | | | | translate the increased efficiency, potential |
| accordingly, HR needs to know so they can | | | | growth, or reduction in cost etc. to dollar |
| assemble the team together, Management wants | | | | amount saved or earned per month. Now |
| to know the Return On Investment (ROI) before | | | | estimate how many months will it take you to |
| embarking on implementation. Some | | | | recover the cost of building the application |
| applications are easy to calculate and others | | | | at that rate. I say estimate because it is a |
| are not so straightforward. We all want our | | | | catch-22 situation otherwise, since you are |
| software application to be designed, | | | | trying to figure out the TCO in the first |
| developed, and deployed on time and under | | | | place. For a number of custom software |
| budget. Exactly how do you calculate total | | | | applications Roi is around 12 months. You can |
| long-term cost of ownership or TCO? Do you | | | | plug-in a few different values for this |
| have to stage "The Price is Right" for | | | | variable and see where do you feel most |
| applications? Not really, the formula is very | | | | comfortable.4. QUALITY QUOTIENT (Qq)This is |
| simple. When practiced every time it will | | | | where science meets art. We are calculating |
| help you budget, compare different | | | | long-term cost of ownership of a custom |
| alternatives, and save while creating | | | | software application, which depends on |
| successful software applications that exceed | | | | factors related to quality of the |
| your customer's expectations.THE | | | | application. If the application has fewer |
| FORMULA:First let me tell you a time-tested | | | | bugs, the QA to Engineering to QA to Deploy |
| empirical formula(1),Long-term TCO = (Fx + | | | | cycle would be short. If application is |
| Lr) * [1 + (Roi/Qq)](Note) 1: Empirical | | | | documented well, future enhancements will be |
| formulas are not proven scientifically, but | | | | easier and answering questions will be |
| they can be accurately applied to most | | | | quicker. Well, you see they all affect the |
| scenarios.And I will now explain the 4 simple | | | | long-term cost of running the application. To |
| variables it uses:1. FIXED COSTS (Fx) | | | | measure what such unknowns will cost us in |
| | | | dollar terms for the life of the application, |
| Start with the technical specifications and | | | | I find it most effective to put quality |
| better yet, sit with the technical lead or | | | | related issues in following four basic |
| architect to find out what are the fixed | | | | buckets and rate them on a scale of 1 to |
| costs. Look at the deployment diagram and | | | | 4:UsabilityReliabilityScalabilitySupportabili |
| find out the cost of each box it shows. Now | | | | tyYou can put a number between 1 and 4 for |
| consider the cost of operating systems they | | | | each of them based on your prior experience |
| will run on, and cost of all the tools that | | | | with same team, or software. If you don't |
| will be installed. Here are some pointers as | | | | have past data, select a number for each that |
| to what a typical project may incur as fixed | | | | you want your application to have. You can |
| cost:Hardware CostsOperating SystemsDesign & | | | | even have your own buckets of four most |
| Development ToolsDatabase SystemsBackup | | | | important factors. Adding these four will |
| SystemsHosting CostsMost recurring costs can | | | | give you the last variable Qq needed for the |
| be converted to a fixed cost by multiplying | | | | formula. |
| per cycle cost with number of total expected | | | | |
| cycles over the life of the | | | | Though the formula asks for Roi in months |
| application.Adding up all the values above | | | | needed to recover the cost, the TCO is for |
| will give you a total dollar amount, which is | | | | the life of the application.WORKSHEET: |
| your Fx in the formula above.2. LABOR COSTS | | | | |
| (Lr) | | | | If you got the idea for formula to find TCO |
| | | | of a custom software application, lets do an |
| Your project plan should have a section on | | | | exercise with your numbers into right column |
| time estimates. Again, your team-lead or | | | | on the worksheet below:Our sample data Your |
| architect can tell you more accurately how | | | | data |
| long is it going to take to build your | | | | |
| application. Consider all roles and | | | | Fx: $120,000 _________________ |
| responsibilities from systems analyst | | | | |
| gathering requirements, engineers developing | | | | Lr: $300,000 _________________ |
| it, to QA testing it and everyone else | | | | |
| in-between. Estimate all their hours and put | | | | Roi: 12 _________________ |
| it in following three buckets:Your Own | | | | |
| EmployeesOnsite ConsultantsOffsite & Offshore | | | | Qq: 14 _________________Substituting |
| ConsultantsIt is better to multiply each | | | | values in TCO = (Fx + Lr) * [1 + (Roi/Qq)]TCO |
| individual's required hours and rate, but for | | | | = 780kThus Total Cost of Ownership for our |
| large teams you can use averages. Adding up | | | | sample application is $780k over its |
| all three buckets will give you a total | | | | anticipated life (around 10 years). This |
| dollar amount, which is your Lr in the | | | | figure really helps budget, compare, and save |
| formula above.3. RETURN ON INVESTMENT (Roi) | | | | on custom application development. |
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