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Added for You - How to Find TCO (Total Cost of Ownership) of Custom Software Applications
Accounts Receivable Factoring is a process by which a small business sells its invoices at a discounted rate to a financing company. The business gets the cash required for the smooth flow of the business. It then becomes the responsibility of the financing company to collect the payments. Also, the company collects the payment at the face value of the invoices. Collecting cash is no easy task, and the company needs to provide services such as customer care, maintaining records and collecting payables. Therefore, the Job profiles of people working in these companies vary.First of all, these companies offer positions for Account Receivable billing analysts. Suitable candidates for these posts need to have a strong background in Accounts Receivable and billing. Expe
4. QUALITY QUOTIENT (Qq)
This is where science meets art. We are calculating long-term cost of ownership of a custom software application, which depends on factors related to quality of the application. If the application has fewer bugs, the QA to Engineering to QA to Deploy cycle would be short. If application is documented well, future enhancements will be easier and answering questions will be quicker. Well, you see they all affect th
I just got back from my local wireless store and I’m full of venom! Have you tried to buy a new phone lately? There are many different prices for every phone. First, it was $150, then $200, then $250. My son, an 11-year old with a Blackberry, wanted the Pearl and had saved enough money; however, because he recently bought another phone, the carrier wanted the highest price - so my little man will have to wait until his next birthday.Wireless carriers seem completely oblivious to the fact that their customers have choices. When I teach companies how to hit a Grand Slam with their customers, I stress the word respect. We are bombarded with messages from wireless companies, morning, noon, and night. These companies are apparently more interested in trying to woo
We all have struggled to find exactly how much custom software applications cost to build, maintain, and enhance over their life. Accounting needs to know so they can budget accordingly, HR needs to know so they can assemble the team together, Management wants to know the Return On Investment (ROI) before embarking on implementation. Some applications are easy to calculate and others are not so straightforward. We all want our software application to be designed, developed, and deployed on time and under budget. Exactly how do you calculate total long-term cost of ownership or TCO? Do you have to stage “The Price is Right” for applications? Not really, the formula is very simple. When practiced every time it will help you budget, compare different alternatives, and save while creating successful software applications that exceed your customer’s expectations.
THE FORMULA:
First let me tell you a time-tested empirical formula(1),
Long-term TCO = (Fx + Lr) * [1 + (Roi/Qq)]
(Note) 1: Empirical formulas are not proven scientifically, but they can be accurately applied to most scenarios.
And I will now explain the 4 simple variables it uses:
1. FIXED COSTS (Fx)
Start with the technical specifications and better yet, sit with the technical lead or architect to find out what are the fixed costs. Look at the deployment diagram and find out the cost of each box it shows. Now consider the cost of operating systems they will run on, and cost of all the tools that will be installed. Here are some pointers as to what a typical project may incur as fixed cost:
Hardware Costs
Operating Systems
Design & Development Tools
Database Systems
Backup Systems
Hosting Costs
Most recurring costs can be converted to a fixed cost by multiplying per cycle cost with number of total expected cycles over the life of the application.
Adding up all the values above will give you a total dollar amount, which is your Fx in the formula above.
2. LABOR COSTS (Lr)
Your project plan should have a section on time estimates. Again, your team-lead or architect can tell you more accurately how long is it going to take to build your application. Consider all roles and responsibilities from systems analyst gathering requirements, engineers developing it, to QA testing it and everyone else in-between. Estimate all their hours and put it in following three buckets:
Your Own Employees
Onsite Consultants
Offsite & Offshore Consultants
It is better to multiply each individual’s required hours and rate, but for large teams you can use averages. Adding up all three buckets will give you a total dollar amount, which is your Lr in the formula above.
3. RETURN ON INVESTMENT (Roi)
This is very important and sometimes tricky variable in finding out the TCO. First of all you need to dollarize the benefits of the application you are building. That means translate the increased efficiency, potential growth, or reduction in cost etc. to dollar amount saved or earned per month. Now estimate how many months will it take you to recover the cost of building the application at that rate. I say estimate because it is a catch-22 situation otherwise, since you are trying to figure out the TCO in the first place. For a number of custom software applications Roi is around 12 months. You can plug-in a few different values for this variable and see where do you feel most comfortable.
4. QUALITY QUOTIENT (Qq)
This is where science meets art. We are calculating long-term cost of ownership of a custom software application, which depends on factors related to quality of the application. If the application has fewer bugs, the QA to Engineering to QA to Deploy cycle would be short. If application is documented well, future enhancements will be easier and answering questions will be quicker. Well, you see they all affect the
Do you know of someone who has recently lost a loved one? If so, you may be interested in sending a sympathy gift. When it comes to sympathy gifts, especially concerning the loss of a loved one, there are many individuals who choose to send flowers. While flowers are nice, you may actually want to think about sending a sympathy gift basket.When it comes to sending a sympathy gift basket instead of traditional flowers, you may be wondering why it is advised. If you have ever lost a loved one, you may know that flowers are how many people send their condolences. While there is nothing wrong with sending flowers, as it is often just the thought that counts, you may want to send a more meaningful sympathy gift. That gift could be a sympathy gift basket.Althou
THE FORMULA:
First let me tell you a time-tested empirical formula(1),
Long-term TCO = (Fx + Lr) * [1 + (Roi/Qq)]
(Note) 1: Empirical formulas are not proven scientifically, but they can be accurately applied to most scenarios.
And I will now explain the 4 simple variables it uses:
1. FIXED COSTS (Fx)
Start with the technical specifications and better yet, sit with the technical lead or architect to find out what are the fixed costs. Look at the deployment diagram and find out the cost of each box it shows. Now consider the cost of operating systems they will run on, and cost of all the tools that will be installed. Here are some pointers as to what a typical project may incur as fixed cost:
Hardware Costs
Operating Systems
Design & Development Tools
Database Systems
Backup Systems
Hosting Costs
Most recurring costs can be converted to a fixed cost by multiplying per cycle cost with number of total expected cycles over the life of the application.
Adding up all the values above will give you a total dollar amount, which is your Fx in the formula above.
2. LABOR COSTS (Lr)
Your project plan should have a section on time estimates. Again, your team-lead or architect can tell you more accurately how long is it going to take to build your application. Consider all roles and responsibilities from systems analyst gathering requirements, engineers developing it, to QA testing it and everyone else in-between. Estimate all their hours and put it in following three buckets:
Your Own Employees
Onsite Consultants
Offsite & Offshore Consultants
It is better to multiply each individual’s required hours and rate, but for large teams you can use averages. Adding up all three buckets will give you a total dollar amount, which is your Lr in the formula above.
3. RETURN ON INVESTMENT (Roi)
This is very important and sometimes tricky variable in finding out the TCO. First of all you need to dollarize the benefits of the application you are building. That means translate the increased efficiency, potential growth, or reduction in cost etc. to dollar amount saved or earned per month. Now estimate how many months will it take you to recover the cost of building the application at that rate. I say estimate because it is a catch-22 situation otherwise, since you are trying to figure out the TCO in the first place. For a number of custom software applications Roi is around 12 months. You can plug-in a few different values for this variable and see where do you feel most comfortable.
4. QUALITY QUOTIENT (Qq)
This is where science meets art. We are calculating long-term cost of ownership of a custom software application, which depends on factors related to quality of the application. If the application has fewer bugs, the QA to Engineering to QA to Deploy cycle would be short. If application is documented well, future enhancements will be easier and answering questions will be quicker. Well, you see they all affect th
A major company proclaims "Employees are our most important asset!" Yet, the same company's culture communicates something much different. It's top-down, command-and-control all the way and employees, like good children, are expected to be seen, not heard.In cases like these we come face to face with the odd couple of communication: explicit and implicit communication.Explicit communication refers to the things we say or write, often messages intended to influence the behavior of others. "Do this" and "Don't do that" count as examples of explicit communication. They leave as little room as possible for interpretation or ambiguity.Implicit communication, on the other hand, refers to the things we do, individually or collectively, usually without regard
Hardware Costs
Operating Systems
Design & Development Tools
Database Systems
Backup Systems
Hosting Costs
Most recurring costs can be converted to a fixed cost by multiplying per cycle cost with number of total expected cycles over the life of the application.
Adding up all the values above will give you a total dollar amount, which is your Fx in the formula above.
2. LABOR COSTS (Lr)
Your project plan should have a section on time estimates. Again, your team-lead or architect can tell you more accurately how long is it going to take to build your application. Consider all roles and responsibilities from systems analyst gathering requirements, engineers developing it, to QA testing it and everyone else in-between. Estimate all their hours and put it in following three buckets:
Your Own Employees
Onsite Consultants
Offsite & Offshore Consultants
It is better to multiply each individual’s required hours and rate, but for large teams you can use averages. Adding up all three buckets will give you a total dollar amount, which is your Lr in the formula above.
3. RETURN ON INVESTMENT (Roi)
This is very important and sometimes tricky variable in finding out the TCO. First of all you need to dollarize the benefits of the application you are building. That means translate the increased efficiency, potential growth, or reduction in cost etc. to dollar amount saved or earned per month. Now estimate how many months will it take you to recover the cost of building the application at that rate. I say estimate because it is a catch-22 situation otherwise, since you are trying to figure out the TCO in the first place. For a number of custom software applications Roi is around 12 months. You can plug-in a few different values for this variable and see where do you feel most comfortable.
4. QUALITY QUOTIENT (Qq)
This is where science meets art. We are calculating long-term cost of ownership of a custom software application, which depends on factors related to quality of the application. If the application has fewer bugs, the QA to Engineering to QA to Deploy cycle would be short. If application is documented well, future enhancements will be easier and answering questions will be quicker. Well, you see they all affect th
Mexico is the #1 consumer of soda in the world per capita. Mexicans thirst for new beverages is great but supply is small. Learn how to be the first to market to penetrate this growing marketMexico has always been at the top of the list when it comes to Beverage Consumption. Mexico leads most categories in beverage or is in the top 10 per capita and as a country.Superstores, supermarkets and convenience stores give beverages number 1 priority in shelve space. When you go into some of these stores you see how different the beverage shelves look.I often travel Monterrey, Mexico City, Tijuana and Guadalajara checking retail accounts like supermarkets. Their first comment was "Wow, look at all this soda"! I'm talking about pallet after pallet on the ret
Your Own Employees
Onsite Consultants
Offsite & Offshore Consultants
It is better to multiply each individual’s required hours and rate, but for large teams you can use averages. Adding up all three buckets will give you a total dollar amount, which is your Lr in the formula above.
3. RETURN ON INVESTMENT (Roi)
This is very important and sometimes tricky variable in finding out the TCO. First of all you need to dollarize the benefits of the application you are building. That means translate the increased efficiency, potential growth, or reduction in cost etc. to dollar amount saved or earned per month. Now estimate how many months will it take you to recover the cost of building the application at that rate. I say estimate because it is a catch-22 situation otherwise, since you are trying to figure out the TCO in the first place. For a number of custom software applications Roi is around 12 months. You can plug-in a few different values for this variable and see where do you feel most comfortable.
4. QUALITY QUOTIENT (Qq)
This is where science meets art. We are calculating long-term cost of ownership of a custom software application, which depends on factors related to quality of the application. If the application has fewer bugs, the QA to Engineering to QA to Deploy cycle would be short. If application is documented well, future enhancements will be easier and answering questions will be quicker. Well, you see they all affect th
Six Sigma professionals have the requisite expertise and experience in implementing Six Sigma projects and their services are necessary for ensuring the success of the implementations. However, not all organizations can afford such services because Six Sigma professionals normally charge hefty fees. The best option then for such organizations is to provide Six Sigma training to their existing employees. Training existing employees not only helps in reducing implementation costs but also ensures that the implementations are completed within the specified time.However, selecting the most appropriate training course for employees may not always be easy because of the recent increase in the number of entities offering Six Sigma training courses. The problem is compound
4. QUALITY QUOTIENT (Qq)
This is where science meets art. We are calculating long-term cost of ownership of a custom software application, which depends on factors related to quality of the application. If the application has fewer bugs, the QA to Engineering to QA to Deploy cycle would be short. If application is documented well, future enhancements will be easier and answering questions will be quicker. Well, you see they all affect the long-term cost of running the application. To measure what such unknowns will cost us in dollar terms for the life of the application, I find it most effective to put quality related issues in following four basic buckets and rate them on a scale of 1 to 4:
Usability
Reliability
Scalability
Supportability
You can put a number between 1 and 4 for each of them based on your prior experience with same team, or software. If you don’t have past data, select a number for each that you want your application to have. You can even have your own buckets of four most important factors. Adding these four will give you the last variable Qq needed for the formula. Though the formula asks for Roi in months needed to recover the cost, the TCO is for the life of the application.
WORKSHEET:
If you got the idea for formula to find TCO of a custom software application, lets do an exercise with your numbers into right column on the worksheet below:
Our sample data Your data Fx: $120,000 _________________ Lr: $300,000 _________________ Roi: 12 _________________ Qq: 14 _________________
Substituting values in TCO = (Fx + Lr) * [1 + (Roi/Qq)]
TCO = 780k
Thus Total Cost of Ownership for our sample application is $780k over its anticipated life (around 10 years). This figure really helps budget, compare, and save on custom application development.
About the Author
Mahesh Lalwani is Founder & CEO of Pacview, your partner in custom software & speech applications. Pacview has worked with dozens of companies in Healthcare, Financial, Technology & Telecommunications, Education and Entertainment industries, helping them create successful software applications that exceed customer’s expectations. Through Pacview’s expertise in design and development our clients enjoy the benefits of building value through successful software applications. Visit our site at www.pacview.com for more information.
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