TCO: The Real Yardstick for Tech Purchase Decisions

With tight budgets and plenty of alternative ways to invest their money, small and medium-sized businesses must always balance value with overall affordability as they pursue software solutions.

Some solutions may seem like must-haves — but if it is not affordable, then the “must-have” quickly becomes a “can’t have.” Often, it is this lack of affordability, rather than caution about technology, that results in many SMBs being viewed as followers when it comes to adopting technology.

It is important to note, however, that “cost” and “affordability” can be relative terms, and in many cases do not correlate directly to the purchase price of the solution.

With more and more technology providers expressing interest in the SMB market, it is important for these businesses to focus on all aspects of affordability when evaluating a solution. In traditional technology markets, this is known as “total cost of ownership,” or TCO.

Multiple factors contribute to the TCO over a product’s lifecycle — many of which may not be apparent at the time of purchase. These can include licensing fees; training; additional software or hardware requirements; upgrades; technical support; integration and implementation costs; maintenance; and incremental price increases for added or premium functionality.

These costs can compound over time, significantly increasing the cost of technology far beyond the original purchase price. For example, most estimates place the TCO at about three-to-four times the actual purchase cost of the average PC, one of the most basic and relied-upon technology assets for most businesses.

Forced to Sacrifice

Often, the only choice for SMBs when looking at solution purchases has been sacrifice. Sacrifice functionality for cost by getting a scaled-down product; sacrifice on timing by delaying purchases until the solution is more commoditized — which in turn reduces its competitive value to the business; or sacrifice in other areas to make the purchase today, betting the value will override the costs.

Fortunately, the technology market is evolving to enable SMBs to acquire full-featured solutions with less sacrifice.

While larger businesses often conduct detailed TCO studies to evaluate their purchases — leveraging data from high-priced market research firms — SMBs often do not have that luxury. In fact, it’s possible that the cost of such detailed TCO research could exceed the budget for the project. Therefore, a simpler model is needed: one that relies on business acumen as much as it does detailed analysis.

To estimate TCO, an SMB can simply look at three major categories of cost:

• Licensing and Maintenance Fees — How much does it cost to acquire the solution and keep it up to date with the latest fixes and enhancements?
• Equipment Costs — What is the cost of equipment that must be in place and maintained to take advantage of the software? Is that equipment dedicated to this one solution, or does it provide value in other areas?
• Human Resource Costs — How much effort is required to train people to use the solution? Are specialists — either on staff or contracted — required to set up, manage, maintain and change the system?

By considering each of these areas, TCO — as well as an understanding of the effort required to begin receiving value from the solution — can easily be estimated.

New Spin on SaaS

New solution delivery models, including Software as a Service, are now providing some interesting opportunities for SMBs. SaaS products are typically acquired through monthly subscription fees, rather than upfront licensing. The subscriptions include ongoing maintenance costs as well.

As a result, the initial acquisition cost is much, much lower. Additionally, depending on the term of the contract, the cost to switch to new technologies — or abandon the system if value is not being received — is lower as well.

SaaS products typically require minimal extra equipment costs. In fact, reliable Internet access is often all that is needed. Some consideration should be given to bandwidth, because SaaS use will drive increased activity on the Internet, compared to normal Internet use.

One area that must be looked at closely when considering SaaS products is human resource costs. Some SaaS solutions are complex to use, requiring lots of training for people to get comfortable with them. Others require technical experts to do a lot of work to configure and tailor the SaaS product to the needs of the business. As the capability and potential value of the solution increases, so does the human resource cost. This is often the make-or-break point for SMBs.

A final consideration in TCO evaluation is the completeness of the solution. In many cases, SaaS solves a finite set of well-defined problems very well, but as customers seek to extend the solution set by integrating other applications or technologies, cost and complexity increase.

To address these challenges, a new breed of hosted products is now emerging that takes SaaS a step further. Rather than just providing software, these products are true Solutions as a Service (SolaaS).

Customized Needs Survey

These solutions combine traditional applications with other functionality — such as integrating interaction technologies like telephony and chat, or providing support for complementary applications — to deliver a more complete and far-reaching business solution.

A key cost consideration for the SolaaS products is their ability to minimize, or eliminate, the need for technology experts in each domain by empowering users to configure and manage their own systems.

One approach to accomplishing this leads users through a business language questionnaire — think of a needs survey. The answers to the questionnaire are used to automatically configure the system to meet the requirements specified. As a result, the solution becomes operational extremely quickly and, since it’s tailored to the business, it is also more relevant and easier to use.

With all of this in mind, SMBs should always ask candidate providers three key questions:

• How much does it cost to acquire the solution and can it be done using a monthly subscription model rather than up-front licensing?
• What equipment is needed to implement and sustain the solution?
• What knowledge and/or training does it take for non-technical users to be able to configure, adapt, sustain, maintain and use the system?

Based on the answers to those questions and further investigation to validate them, SMBs should have a good feeling for what the likely TCO of the solution will be. With that in hand, they can decide if the solution is truly affordable for them. If so, then the entire focus is on the potential business value — which is where most of their energy should be directed anyway.