The Most Common Myths About Software TCO Calculation

Executive Summary

• We explore some of the most common myths and misunderstandings around software TCO calculation.

Introduction

There are a large number of misunderstandings regarding TCO calculation. These misunderstandings often come from not having performed TCO estimations first hand. In this article, I will get into some of the important myths around TCO calculation.

TCO Myth #1: That TCO Calculations Can be Derived from a Single TCO Model

TCO models change depending upon account size and other factors. There are a few ways to lose credibility when presenting TCO calculation, and one way is to present an estimation that is not customized per the account.

Observing a Sample Brightwork TCO Calculator

As you can see, the TCO calculator for the Brightwork SAP ECC TCO Calculator page has adjustable features. Still, this adjustability has limits. It is not possible to develop a single adjustable model that can account for all of the significant factors.

Accounting for Project Scale in TCO Calculation

For example, you can’t just scale a model from 400 development objects up to 3000 without adjusting the model, or what amounts to tweaking the parameters within the model.

What if the company itself is huge, but it has few development objects to manage during the implementation versus a medium-size company with many development objects? The same model can be be “stretched” to account for both scenarios.

TCO Myth #2: It is Not Necessary to Customize the TCO Model for the Client or Prospect

In addition to a lack of accuracy, non-customized models come off as very “salesy” and present a generic feel to prospects and clients.

Communicating this reality and puncturing this myth is very difficult to get across to vendors. Vendors would like to have a single TCO model that can be used for any customer.

How My Experience with TCO Led to this Observation

When I first started doing this work back in 2014, I thought it would be more feasible to create more applicable models that could “flex.” This was, in fact, the original goal of developing online TCO calculators. However, the more modeling I performed with more applications, the more I ran into problems trying to make a single infinitely flexible model.

TCO Myth #3: TCO Estimations Can be Provided Top Down and Extemporaneously

There is also an expectation that one can work top-down to estimates. I am now sure this is not true.

Without using a model and going bottom-up. When put on the spot to just give a TCO range, I draw a complete blank. This is because I cannot hold in my mind all of the factors and come up with some type of “range.” I need the model to perform the calculation. This is frustrating for people who seem to think I should be able to provide them with an estimate without consulting the calculators that I have built. What is even odder is that people will demand a TCO estimate on a call, without even considering the idea that I would need to think about it. That is there seems to be some type of need to obtain an instant answer and TCO estimate. I have been ambushed on calls where there was never any discussion of providing a TCO estimate prior to the call, and then multiple people will take turns trying to wrench a TCO estimate out of me.

And allow me to provide an example of one area of calculation that is nearly never mentioned in the world of “FTEs.” What is the skill level of the developer or software configured?

FTEs and Interchangeable Legos

Just about every TCO estimate I have seen holds the FTEs as if they are interchangeable “Lego people.” There are numerous reasons why this is false, but let us take just one example which is from outsourcing.

Real Outsourced Resource FTEs?

That means talking to the resources. Today, many companies have some type of outsourcing contract where development productivity is extremely low, but they receive an “excellent price.”

I have observed many clients where they appear to be getting very little out of the outsourced group. They may have 40 FTEs that are assigned to the client. However, are these real FTEs? I say this because it is well known that outsourcing firms will name FTEs that are in reality shared among multiple customers, so they are not FTEs, but PTEs. Naturally, the outsourcing firms won’t admit this. Therefore, this must be included. Normally an offshore/outsourced FTE is worth less than 1/2 of a real FTE that is employees of the company, which can be verified.

This is just one example of the problem in estimating FTEs and FTE skills.

Conclusion

These are some of the common myths of software TCO calculation.

One of the major conclusions of the Brightwork Research & Analysis research into TCO is that there is generally a shallow level of understanding around software TCO calculation. For this reason, it is straightforward for myths to become commonly accepted.