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