The costs involved in complete TCO analysis
Traditional approaches to guiding software replacement and procurement decisions tended to be too narrow, focusing mostly on upfront costs. TCO analysis is an attempt to establish the wider, long-term financial impact of owning and operating software, considering factors such as the cost of maintaining and supporting the system.
However, the standard approach to TCO analysis can still fall short in giving you the full picture. What about factors such as business agility, staff morale, and the solution’s ability to empower you to become a partner to the wider business? To establish the total Total Cost of Ownership, you need to consider direct, indirect, and hidden costs.
Direct costs of finance software
License fees
When the choice is between continuing with an on-premise system or moving to a cloud-based subscription model, the comparison is usually between a fixed annual fee and perpetual licensing costs. Scalability should be factored in here too, though. How easy and cost-effective is it to onboard new licenses when you need them?
Hardware
Calculate the cost of servers, networking equipment and storage required to support your system and the extent to which these could be eliminated by moving on.
IT input and ongoing staffing costs
Implementation of your new product will likely require configuration, migration, onboarding and training investment. Look carefully at your current expenditure though. What does it cost to maintain servers, patch systems, and support users now? How does this compare?
Third-party tools
Over time, a legacy system can develop a significant amount of sprawl as APIs, ETL tools, bespoke reporting tools, plugins and middleware are introduced to plug gaps and meet evolving needs. What is the ongoing cost of maintaining this, and how does it compare with newer alternatives - especially those which incorporate integrations and ensure compliance?
Disaster recovery
What is the cost of maintaining current infrastructure for resilience and failover, and how does this compare with a managed alternative?
Indirect costs
Long process cycles
How long do your monthly close and consolidation, reporting, planning, and other core processes typically take? What level of team resource is required for each, and how does this translate into financial cost? Compare and contrast this with proven results on cutting cycle times from alternative solution providers.
Manual workarounds
Examine the monetary cost of time spent by team members outside the core system as a result of functionality gaps such as resorting to Excel for exports and reconciliations.
The cost of recurring inefficiencies
Consider each core process. Identify and quantify the amount of work spent, for example, on:
- manually reconciling inconsistencies
- email ping-pong linked to approvals
- the absence of version control
- waiting for IT to deliver reports due to the absence of self-service capabilities
- lost productivity due to laggy performance and system crashes, bearing in mind the frequency of crashes increases over time.
Compare this to the new system, taking into account time spent adjusting to new workflows and a possible temporary slowdown during transition.
Hidden costs
The cost of the agility gap
A sudden change occurs in the FX market or to the borrowing rate. A geopolitical crisis leads to an outage impacting one of your supply chain partners. An M&A opportunity arises with a limited window to take action. Consider recent instances where these types of circumstances have arisen. To what extent was your ability to respond in an agile manner hindered by unwieldy processes, particularly around financial planning and analysis? What was the financial consequence of the delay? How might this issue be alleviated by access to rapid and reliable FP&A functionality?
‘Regret’ cost: the price of making the wrong move
An unexpected event means you are required to make cost savings to improve cash flow. There are, however, multiple possible responses. Should you make across-the-board reductions, or target particular areas? How many times have you made decisions based on incomplete analysis of likely consequences? To what extent could your ability to avoid costly wrong moves be improved by the implementation of financial software with integrated scenario planning capabilities?
It may be that you already have some scenario planning capabilities. But if your existing system leaves you hamstrung with overly-long processes meaning you don’t have the bandwidth to put it to work, it’s almost certainly time to consider an alternative.
Compliance costs
If current processes involve sensitive data being emailed between users, consider the likely repercussions of it falling into the wrong hands. Think about the stopgap or custom solutions you have in place to handle a range of regulatory obligations. To what extent do these deviate from best practice? What are the financial implications of a breach?
People costs
Consider carefully the factors holding you back from retaining and attracting talent. Is time spent on needlessly long close cycles, manual checks, and other process inefficiencies leading to resignations and a lack of applications?
Business partnering cost
“Companies need real-time information, with the best people, thinking critically”. This was one of the key takeaways from our Q&A with EY. Time spent grappling with legacy technology and inefficient processes means less time for Finance to perform its role as a partner to the wider business. To what extent are you currently able to provide timely, actionable insights to stakeholders? How might this be improved through the introduction of mature, powerful finance technology?
What next?
As you progress through analysis of direct to indirect and ‘hidden’ costs (including opportunity costs), it undoubtedly becomes more difficult to put an exact number on each. However, that’s not to say these costs should be discounted as part of any TCO analysis. In most cases, doing nothing is the exact opposite of a safe or neutral strategy. A resilient, agile business requires a Finance function willing and able to provide insight and add value. Waiting for formal ‘end-of-life’ means the business waiting longer for you to deliver. Can you afford to wait?
