Tuesday, October 29, 2019

What Are the Real Costs of Your Technology Project?

What Are the Real Costs of Your Technology Project?
As a project recovery specialist who works with organizations to help turn around troubled technology projects, I do a lot of cost evaluations and projections as part of my project review process.

Project budget and costs are topics of much discussion and I have more than once seen red faces and yelling matches between executives because of it. Lack of transparency, unexpected costs, and cost attribution being mostly the reason for such outbursts.

Understanding the real cost of a technology project helps you to determine if you should start, stop, or continue a project. It also helps you with vendor selection and project valuations. It is invaluable input for good decision making.

Total Cost of Ownership (TCO)

The real costs of your technology project can be found through the Total Cost of Ownership (TCO) of the solution your project is implementing.

TCO is an analysis meant to uncover all the lifetime costs that follow from owning a solution. As a result, TCO is sometimes called 'life cycle cost analysis.'

When evaluating the TCO, there are four main types of costs (or buckets) to consider:

1) Acquisition costs
2) Implementation costs
3) Operation costs
4) Improvement costs

The length of the TCO period depends on the expected lifetime of the solution. This can be any number of years, but typically for technology projects five years is used.

So, to estimate the TCO you calculate the cost for each bucket for each year of the chosen lifetime. In the end you add all costs up.

Acquisition Costs

Typically, this bucket will include the outright purchase of hardware and software. It is usually accounted for as a capital expense in the organization’s budget and can be depreciated over time.

There may also be a people component that should be accounted for in determining the total acquisition cost, represented by the time required to evaluate different vendors or solutions.

Additionally, acquisition cost may include the necessary pre-conditions to enable the new technology to function properly, such as new hardware to support a new software platform or the purchase of upgrades to existing hardware and software. In effect, any one-time purchase should be counted towards the acquisition cost of the technology.

With software as a service (SaaS) solutions like Salesforce or ServiceNow your acquisition costs are usually limited to the evaluation process. You will pay for the software on a monthly basis.

Implementation Costs

Once any necessary hardware or software has been acquired, it has to be set up, made operable according to its intended use, and deployed to the intended users. Costs in this category generally consist of the installation of hardware, software, and network connectivity.

Let’s take for example a Salesforce implementation. The increased use of web-based solutions might require a faster, more robust internet connection, which, depending on the organization’s office situation, could require installation costs on the part of the broadband vendor (or even a change in vendor), as well as the time cost of configuring and deploying the system.

Typically the bulk of your implementation costs come from the many people inside your company that will be key to your project’s success. Give a rough estimate of how many hours per week each of them will be involved in the research, implementation, and subsequent maintenance of your Salesforce implementation. In some cases, you may even want to hire a new staff member to oversee your implementation and maintenance.

Additionally, it’s also important to include the cost of training users on the new technology and have some sense of the impact of the change on productivity and efficiency. In almost every case, implementation of a new system causes a short-term dip in efficiency as users get used to working in the new environment. (Understanding that this dip is going to happen and planning how to help users transition through it is an important part of the change management process of a project.)

Depending on accounting interpretations, much of the implementation cost may be treated as a capital expense, and it is often the largest visible cost of a project, particularly when using external consultants to do the implementation.

Other fees to consider for a Salesforce implementation include additional licenses for your implementation partners as they’ll need their own login, a developer sandbox license for development and testing in an isolated environment, and a license for an API user. An API user will be how your third-party apps sync with Salesforce so this license needs to be separate from a user who might leave your organization at some point.

As with acquisition costs, implementation costs are generally one-time expenses, although they may fall within multiple budget years depending on project timing. Training and adoption support don’t usually qualify as capital expenses.

Operation Costs

Although often not highly visible in planning for projects, there are ongoing costs of keeping a new solution up and running in the long run, as well as scaling it to additional users. These are known as operation costs.

Operation costs include warranties, support contracts with external vendors, ongoing license costs and, occasionally, upgrade costs. The project charter must be able to forecast these recurring costs based not just on current numbers, but also on the organization’s planned future state.

For example, if Salesforce costs $25 per user per month with 3,000 current users, but the organization plans to scale it to 5,000 users in three years, the cost will also scale, which can provide an unwelcome surprise from a budgeting perspective unless it’s been planned for from the outset.

In addition to Salesforce licenses, you may need licenses for other applications. This could include a form solution, a payment processing solution, an email marketing solution, and more. After all, one of the biggest reasons people move to the Salesforce ecosystem is the ability to integrate third-party apps.

Additionally, future costs planning must take into account the staff resources necessary to meet the organization’s needs. This could include support or administrative staff for the technology, general technology support to keep up with the organization’s growth, and management capacity to keep up with the organization’s strategic planning.  This capacity may be maintained in-house or provided by external partners. Both having different impact on your TCO.

Improvement Costs

Deploying new or additional functionality or moving into a higher tier of an implemented SaaS solution with more features are typical improvement costs. Custom development and integrations with legacy systems are also very common business needs.

In my opinion you should take a certain percentage of your operation costs and budget these as improvement costs, because this is reality. Fifteen percent is a good value to start discussions.

The Real Costs of Your Project

Now that you've made estimates for each of the four bucket areas for each year of the chosen solution lifetime you can compute your project's Total Cost of Ownership.

With that, you're one step ahead in understanding the real costs of your technology project. You understand now the cost drivers for implementation as well as operation. You can compare different solutions as well as offers from different vendors and implementation partners.

You also have 50% of the information you will need for a project valuation. The other 50% of information you need are the benefits of your project which I cover in my article "What Are the Real Benefits of Your Technology Project".

In a nutshell: In order to make a good decision about starting, continuing, or ending a project you need to understand the real costs of the project. The Total Cost of Ownership (TCO) is the only metric that provides this understanding.

You can buy my eBook The Project Valuation Model ™ by clicking here or on the image.

Posted on Tuesday, October 29, 2019 by Henrico Dolfing