Understanding Total Cost of Ownership

Posted on Idealware on May 24, 2012.

As budgets at nonprofits are always tight, the first question about a new project is usually “How much is this going to cost?” It’s a question that makes most consultants cringe, not just because the wrong answer can cause them to lose the project, but because deciding solely on cost doesn’t always lead to the best decisions.

If you talk to your nonprofit colleagues, you may hear many stories of technology tools that were chosen for a low sticker price, but then cost much more overtime. They may be stuck with a tool that costs a great deal to maintain, that required large equipment purchases, or that has lots of extra charges for seemingly basic features.

Those situations demonstrate why it’s very important to look at the Total Cost of Ownership (TCO). TCO includes the up-front purchase price, but also the associated costs that come up over the lifetime of the product, such as maintenance, support, hosting and equipment costs.

Even if you use volunteers to implement your tech project, TCO must still be a consideration. You will want to make sure that the volunteers implement your solution using tools that have low costs over time, and you need to be sure that you can find affordable support for the tool after they move on, as volunteers leave for many reasons. (Here are more tips for having a successful volunteer tech project.)

How long should I plan on my technology tools lasting?

That varies a bit, but it’s generally recommended to budget for replacement costs every 3-5 years. Hardware will definitely be showing its age around that time, and you can predict that your website or database will be in need of significant upgrades then, if not a full replacement. As technology is constantly evolving, in 3-5 years you may want to upgrade to tools that have new and better features, even if there is still some life left in your old ones.

How do I get quotes for TCO?

As you get bids for your project, you will likely hear mostly about the up-front price. You may hear a bit about some of the long-term costs, but it’s rare to have a vendor include a full TCO. You’ll likely have to do a bit of math on your own to calculate this in a way that allows you to make an apples to apples comparison between the different bids that you receive.

Here are some tips and questions to ask to help you gather enough information to get an idea of TCO for your project:

1. Do some internal planning before going to consultants, vendors or volunteers. In last week’s post, I outlined the key steps involved in planning for a tech project – make sure to read that if you haven’t already. Knowing your project goals and having a prioritized list of features will help you be sure to ask about the key items required for your project’s success.

2. Ask if there are any licensing or other fees. This is probably the most obvious question when calculating TCO, and it’s a very important one. Make sure to ask for the amount of these fees and their frequency.

3. Ask about all of the features your team has identified and if any of them have their own long-term costs. Certain tools have monthly or annual fees for certain features, like providing a connection between your website and database. With other tools, the cost of developing those features may be included in your project quote.

4. Will this solution be cloud-based or on-premise? Both options can have can long-term additional costs. I won’t go into the pros and cons of using cloud-based vs on-premise solutions here – I just want to point out that both options can have associated costs. Cloud-based programs often have hosting fees, and on-premise solutions will often require significant hardware purchases or network upgrades. If a solution requires new hardware, you will need to budget for both the purchase and the long-term costs of maintaining that equipment.

4. Ask specifically about these project components. These are important for success, but they are also commonly left out of quotes or are listed as optional items. Check on these with all of your consultants/vendors, so that you can make a valid comparison between your bids.

  • Data Migration: This means bringing your existing data/content from your old system into the new.
  • Training: Different consultants/vendors provide different training options, so it’s good to ask how much and what kind is included to help with your comparison.
  • Ongoing maintenance and support: Check in both for the costs of end-user support (when you call with questions or needing help) and regular maintenance (things like running software upgrades).
  • Documentation: It’s important to have an owners manual for your staff to reference between trainings, so make sure to get the cost of this if it’s not included. Make sure that this documentation covers any custom features or set-up.

By calculating TCO, you will be sure that you are making good decisions not just for this budget year, but for years to come.

Has your nonprofit gotten stuck by hidden, long-term costs after a technology project closed? Has calculating TCO helped you make a good choice in past projects? What else might you recommend that nonprofits consider when calculating project cost? Join the conversation in the comments by answering these questions or asking others of your own.


Title image is combined from works by Flickr users 401K and vdowney