How to find the TCO (total cost of ownership) of custom software applications

So you can budget, compare and save.

We’ve all had a hard time finding out exactly how much it costs to build, maintain, and improve custom software applications over their lifetime. Accounting needs to know in order to budget accordingly, RR. H H. needs to know in order to get the team together, Management wants to know the return on investment (ROI) before embarking on the implementation. Some applications are easy to calculate and others are not so easy. We all want our software application to be designed, developed and deployed on time and within budget. Exactly how is the long-term total cost of ownership or TCO calculated? Do you have to organize “The right price” for applications? Not really, the formula is very simple. When practiced every time, it will help you budget, compare alternatives, and save while building successful software applications that exceed your customers’ expectations.

THE FORMULA:

First let me tell you a proven empirical formula(1),

Long-term TCO = (Fx + Lr) * [1 + (Roi/Qq)]

(Note) 1: Empirical formulas are not scientifically proven, but can be accurately applied to most scenarios.

And now I will explain the 4 simple variables that it uses:

1. FIXED COSTS (Fx)

Start with the technical specifications and, better yet, sit down with the technical lead or architect to find out what the fixed costs are. Look at the layout diagram and find out the cost of each box it shows. Now consider the cost of the operating systems they will run on and the cost of all the tools that will be installed. Here are some tips on what a typical project may incur as a fixed cost:

hardware costs

Operating systems

Design and development tools

database systems

backup systems

lodging costs

Most recurring costs can be converted to a fixed cost by multiplying the cost per cycle with the total number of cycles expected over the lifetime of the application.

The sum of 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 precisely how long your app will take to build. Consider all the roles and responsibilities, from systems analysts gathering requirements, the engineers who develop them, to QA testing, and everyone else in between. Calculate all your hours and put them in the following three buckets:

your own employees

On-site consultants

Offsite and Offshore Consulting

It’s best to multiply the required hours and rate for each individual, but for large teams you can use averages. Adding all three cubes together will give you a total dollar amount, which is your Lr in the formula above.

3. RETURN ON INVESTMENT (King)

This is a very important and sometimes complicated variable to figure out the TCO. First of all, you must dollarize the benefits of the application you are creating. That means translating efficiency gains, potential growth or cost reduction, etc. to the dollar amount saved or earned per month. Now calculate how many months it will take you to recoup the cost of building the app at that rate. I say estimate because otherwise it’s a catch-22 situation, since you’re trying to calculate the TCO in the first place. For a series of custom software applications, King is around 12 months. You can plug in a few different values ​​for this variable and see where you feel most comfortable.

4. QUALITY COEFFICIENT (Qq)

This is where science meets art. We are calculating the long-term cost of ownership of a custom software application, which depends on factors related to the quality of the application. If the application has fewer bugs, the cycle from QA to engineering to QA to implementation would be short. If the application is well documented, future improvements will be easier and answers to questions will be faster. Well, you’ll see that they all affect the long-term cost of running the application. To measure what such unknowns will cost us in dollar terms over the lifetime of the application, I find it most effective to place quality-related issues into the following four basic groups and rate them on a scale of 1 to 4:

usability

reliability

Scalability

Compatibility

You can put a number between 1 and 4 for each of them based on your previous experience with the same equipment or software. If you don’t have previous data, select a number for each you want your app to have. You can even have your own cubes of the four most important factors. Adding these four will give you the last variable Qq needed for the formula.

Although the formula asks for the ROI in the months needed to recover the cost, the TCO is for the lifetime of the application.

SPREADSHEET:

If you had an idea for a formula to find the TCO of a custom software application, let’s do an exercise with your numbers in the right column in the worksheet below:

Our sample data Your data

Foreign exchange: $120,000 _________________

Lr: $300,000 _________________

King: 12 _________________

Qq: 14 _________________

Substituting values ​​in TCO = (Fx + Lr) * [1 + (Roi/Qq)]

total cost of ownership = 780k

Therefore, the total cost of ownership for our sample application is $780,000 over its anticipated useful life (about 10 years). This figure really helps budget, compare and save on custom app development.

About the Author

Mahesh Lalwani is the founder and CEO of Pacview, your partner in custom software and voice applications. Pacview has worked with dozens of companies in the healthcare, finance, technology and telecommunications, education and entertainment industries, helping them build successful software applications that exceed customer expectations. Through Pacview’s experience in design and development, our clients enjoy the benefits of creating value through successful software applications. Visit our site at www.pacview.com for more information.

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