How to More Precisely Estimate Total Cost of Ownership
To help your organization estimate the total cost of ownership for a new technology platform, let's look at how to structure your estimates, why these costs are essential, and where deeper due diligence can prevent underestimating or missing key items.
For starters, you'll want to create a timeline to organize your costs, as each of these will hit at different periods. The easiest way to do this is in a spreadsheet with Excel or Google Sheets.
In the first column, list what the associated costs are (e.g. core platform licensing, training program fees, etc); refer to this newsletter for a variety of those costs.
Starting in the second column, have a header that starts with the first year in which costs will hit (i.e. likely the current year) and continue this for subsequent columns.
You'll now have a matrix to populate estimated costs by type (row) and year (column).
Using that structure helps you see when each cost will impact your budget and help those in finance and accounting plan cash flow.
At a bare minimum, here's why you want to have each of these costs represented in your spreadsheet:
Core platform licensing: ensuring that you have the right products or services is critical, especially if your platform's vendor has rigid contractual terms to prevent swapping or reductions
Initial setup and implementation fees: you can't start using your platform until it's ready, which means configuring and integrating it into your organization's processes and technology stack
Third party apps or services licensing: these are necessary to fill gaps in functionality of the core platform (e.g. branded proposal generation), connect to your other systems (e.g. integration platforms), and manage high-risk, low-probability events (e.g. data backup services)
Training program fees: ensuring your employees are aware of the new platform's features and functionality is a requirement, regardless if you intend to leverage a managed services vendor, as you should have a working knowledge to plan and vet vendors
Support or maintenance fees: assumptions are often made that things will run smoothly and that your organization's employees are able to manage support and maintenance
Hiring new employees: if you're intending to be independent or codependent for supporting the platform, you'll likely need to hire new employees with expertise in addition to training existing employees
Despite including those costs in your plan, some are often underestimated. Let's explore where you'll want to do extra diligence:
Core platform licensing is underestimated when price increases at renewal are not included in the timeline
Initial setup and implementation fees is often underestimated in both budget and time, resulting in higher expenses over a longer timeline; consider padding these estimates by 20% to 100%
Third party apps or services licensing are often wildly underestimated, as assumptions are made that the core platform can fully satisfy use cases or rushing to make a decision without understanding the full scope of what is needed
Training program fees and hiring new employees are typically underestimated or entirely missing, which means your organization will end up with higher explicit costs (e.g. support or maintenance fees) and implicit costs (e.g. productivity loss as employees supporting the platform need time to train themselves)
If you're unsure about how to estimate these items, proactively seek guidance from each of these groups to inform your estimates:
Platform vendor's sales and customer success teams
Vendors involved in consulting, implementing, or providing managed services
Independent professionals from your network
Independent professionals without a vested interest can provide a more objective view on estimated costs, which balances any misaligned incentives that you may have with those first two groups.
TLDR: More precisely estimated total cost of ownership by mapping costs over time, plus increased renewal fees, third-party apps, training, and staffing.
