As good a source as any for this purpose, Wikipedia defines Total Cost of Ownership (TCO) as a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. TCO, when incorporated in any financial benefit analysis (like an ROI calculation), provides a cost basis for determining the total economic value of an investment. A TCO analysis includes total cost of acquisition and operating costs as well as costs related to replacement or upgrades at the end of the life cycle. A comparative TCO analysis is used to compare the cost of alternative capital investments, and is commonly used with information technology products to quantify the financial impact of deploying alternative solutions.
When calculating the TCO for a upgrading your ERP solution to the Cloud, it is worthwhile to do a comparative TCO between staying where you are, moving to an On-Premise version of the new solution, and moving to the cloud. As part of this analysis you should consider the following costs:
Staying where you are, or moving to an on-premise version will involve infrastructure or platform costs. These costs are incurred to provide the foundational systems required to effectively run, manage, and secure the ERP solution. For on-premise applications, this includes server and networking hardware, operating systems, databases and data storage. It also includes datacenter costs like electricity. Don’t forget to include the labor/resources needed to get the platform in place as well as keep it maintained and operating at optimum performance. For cloud-based systems, this includes the subscription licenses to access the cloud infrastructure if applicable. It may also include additional telecommunications infrastructure to ensure you have the best possible connections to the internet. For both versions, you should also consider your desktop systems (e.g. workstations) and devices (e.g. scanners). Note that new cloud versions of ERP are optimized to run with cloud versions of products like Microsoft Office.
Application Software Costs
This is the cost of the actual software application or service. However, it’s more than just the sticker price or subscription of the application. It also includes the cost of all complementary products required to extend the product to meet your specific requirements, such as ISV solutions, add-on applications, and integration programs or services that ensure your ERP is fully inter-operable with existing systems that will be retained moving forward.
Implementation Services Costs
You are unlikely to be able to successfully implement the ERP without some help, so you will need to account for the cost of the professional services from the ERP specialists who will help you.. These costs include the cost of getting the software up and running, configuring parameters, evaluating and choosing the best transaction workflows, developing and customizing the application(s) where required, integrations, as well as migrating data. You may also need your ERP partner to support your internal training efforts. From a cost perspective, this includes the internal costs (the time commitment of your own resources) as well as external costs (professional services from vendor resources). It also includes costs that support the project, such as solution selection, change management, process auditing, process re-engineering, and project management.
The costs don’t stop after implementation. You also have the maintenance costs of the ERP, which include the loading of fixes, patches, updates, and upgrades. With cloud solutions on a continuous upgrade cycle, this will mean the cost of keeping the requisite system sandboxes in place, as well as the resource commitment for testing updates as they are released and deployed into your own systems. They also include internal and external end user functional and technical support as well as break/fix support services.
A full TCO should include decommissioning costs of your legacy platform. However, in many cases, organizations chose to keep their old systems available to support historical reporting and analysis. For those that wish to retain historical transactional data as the basis of reporting, a common approach is to migrate that data to a cloud data repository, allowing the full commissioning of the on-premise hardware and software.,
Of course, these are only the main consideration costs for ERP Total Cost of Ownership. ERP TCO also has not-so-obvious considerations that need to be taken into account for an accurate TCO calculation. See our TCO post regarding these additional considerations for more detail.