Understanding the Total Cost of Ownership for Cloud-Based Software

Understanding the Total Cost of Ownership for Cloud-Based Software

by Christophe Primault
Published on 14 December 2011

When moving your business apps to the cloud, understanding the Total Cost of Ownership (TCO) aspect is key to make the right decision.

What should you take into account in the TCO calculation ?

Is online really cheaper compared to in-house software?

We are giving some initial answers and a simple methodology to small business owners looking at switching to web-based applications.

The Cloud value proposition

Online software is all the buzz right now and new cloud based applications for small businesses are rolling out new extremely quickly.

The more common value propositions for moving to the Cloud are:

  • low cost of entry
  • fewer IT resources to manage company systems
  • shorter implementation time
  • almost zero capital investment
  • flexibility to "pay as you go"

But there are also hidden costs and when looking at cloud based software offerings v.s in-house software, businesses should consider all the components that make up the total cost of ownership.

Compare apples with bananas

To make a real omparison, take a simple spreadsheet and start comparing the following anticipated costs for the next five years:

  • capital investment (hardware and software licenses)
  • implementation
  • ground to cloud integration (with legacy software)
  • cloud to cloud integration (with other cloud apps)
  • maintenance
  • support
  • training
  • security
  • other running costs ( such as hosting)

With cloud based apps, although the provider will provide the hosting you will still have to implement the tool, integrate it with other systems as well as migrate existing data into the new system. All of which has to be taken into consideration when choosing wich technology route to go.

Understand how you get billed

As they are hosting and monitoring all the users of their products, online software vendors can turn on and off modules and measure usage by user very easily. This allows them to customize offerings and introduce different types of billing models.

Although you almost always pay on demand for cloud-based software, you need to be aware of the different pricing models.

The main billing methods are per:

  • users ( or seats)
  • number of transactions
  • features you use
  • amount of data stored

Although most vendors have a very transparent and simple pricing model, additional service charges, such as extended support, can be added to your monthly subscription. Watch the terms of use in the small prints when building up your TCO calculation.

Take into account the possibility of scaling down

Analyst firm Eval-Source,uses the analogy of owning a car to explain the different way to "own" software.

The cheapest way to own a car is to buy it cash, after that is to finance the car, after that it is to lease the car and finally the most expensive way is to rent. Cloud-based software, in most cases works the same way.

When you make an up front TCO analysis and you add up your monthly cost over a period of time, paying on demand can become more costly than a one off on-premise license. Many businesses are okay with this, because paying as you go gives you the immense advantage of being able to adjust your costs if you need to scale down usage.

Beware of the data integration costs

When switching to the cloud, an often underestimated cost is to import your legacy in house data to the online system. There is often a significant cost to release the data created over the several years of systems use.

The incumbent vendor is unlikely to be helpful and there is a data export clause that is usually hidden in the fine print of the Service Level Agreement under the support and maintenance portion of the contract. Check it out and add to your TCO calculation.

Think about yesterday, today and tomorrow

Despite the numerous benefits of online software, when choosing which way to deploy an application on-premises can be more advantageous in certain situations.

As a business, you must do your due diligence in conducting a full blown evaluation where the two options are compared from a TCO standpoint.

In the end it comes down to what is more valuable to your business based on your legacy, your current situation and how you think things will evolve.

It will almost always boil down to a trade-off between capital expense or operating expense. Think about which fits your strategic business plan and infrastructure vision.

In any case, total cost of ownership should be investigated in its entirety before a decision is made to purchase a new software tool for your business.

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Article witten in collaboration with Eval-Source. Feature image courtesy of Flickr userwHatEvEr