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How to Calculate Total Cost of Ownership (TCO) of ERP Software Before the Purchase

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    According to one business dictionary, total cost of ownership (TCO) is an "estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle."  If you have ever considered purchasing a car, you have probably heard of TCO, mainly because so much of the expense of owning a car hits you after purchase (gas, insurance, maintenance and repairs).

    In terms of computer software purchasing, TCO includes the hardware, operating system, supporting software, installation, training, repairs, maintenance, upgrades, and technical support.  Some of these costs are direct, while others are considered indirect.  A site license, for example, is a direct cost, but the training is an indirect cost.

    You might think you can guess the total cost of ownership for the ERP solution you want to purchase, but the best practice is to actually have a calculation method in place.  Make a list of factors that will effect how much direct and indirect cost your software will eventually require.

    For example, there are many small ERP vendors that offer personalized technical support and service.  Their services may even cost more than larger vendors, but having fast, effective technical support will save you money on repairs and personnel needed to troubleshoot problems. 

    On the other hand, a large vendor like Microsoft may have smaller partners who will offer similar service.  Additionally, with Microsoft Dynamics GP, you would have better integration with Microsoft Office, Dynamics CRM, SharePoint, and other crucial business software.  All of this saves money on training and additional software development (to manufacture compatibility), while not necessarily costing you any more for support.

    To effectively determine the total cost of ownership for ERP, you need to consider your implementation strategy, your company's actual needs, and the amount of time and money you will need to put into the software one, five, or even ten years down the line.

    Another good example is cloud computing.  Cloud-based ERP computing is becoming more popular, and the initial expectation is that it will lead to savings on hardware and maintenance costs. 

    To determine if that expectation is actually true, you need to evaluate the total cost of comparable on-premise software, taking into consideration the benefits that go along with it. If, for example, customization is a feature you really need, an on-premise solution may save you money, especially if the only way to have the customizations you want with the cloud solution is to develop a third-party application.

    The key to understanding total cost of ownership for ERP software is to have a plan from the beginning.  List all of the factors you want to evaluate, and then proceed to analyze them for each software solution you are considering. 

    In the end, you should be able to come up with a quantifiable answer, a price that tells you how much you will actually spend on each one.  Ultimately, you may still decide to go with a solution that has a slightly higher cost, if it provides the tools you actually need.  The important thing, however, is that you will know what you are getting into long before you make the purchase. 

    By ERP Software Blog Editors, Microsoft Dynamics ERP Partner Directory

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