2.6 Example cost structure

This paragraph will describe an example on how to construct a cost structure by just talking about the software that needs to be selected.

Consider the following situation…

The subject is some new business application. It will be bought from a vendor (so it's not gonna be some new development). The department which will use the new software consists of 25 employees who will all be users of the system.

From a technical point of view, the system should fit into the current infrastructure of the department. No network changes should be required and no new workstations should be purchased; the stuff should run on the existing PCs. A server can be bought if there's not enough room to host it on some existing hardware. So we will calculate for the worst case (buying new).

This is all pretty global as you would agree. But let's see with what we can come up with.

-                     Software licenses for 25 users

-                     Maintenance for the software

-                     Hardware (server)

-                     Maintenance on the hardware

If we make use of some existing components (PCs, infrastructure) for a complete result we should include the cost for them also. Although we don't purchase anything new, they are actually costs that are needed to run the system as a whole. Most of the time, current costs are available and perfectly suited for this purpose.

The IT department has calculated that for the amount of users and for the amount of applications these users have, the annual cost for the infrastructure is $25,000 just related to the new system, and for workstations it is $15,000. All equipment is already written off, so there are just annual costs.

-    Hardware (workstations) annual cost:    
            $ 15,000

-    Infrastructure annual cost:                 
            $ 25,000

For the comparison of the new systems, these costs have no influence, as they for all be considered the same. But they should be included, even just to make everyone aware you thought of it.

A very quick scan on the potential candidates for the new application, learned that most of them just use a good old fashioned client-server model, and they all use a database from a third party.

So, this creates for us extra cost components:

-                     Database licenses 25 users

-                     Database maintenance over these licenses

The department at hand has a pretty general workflow, it's not expected to have certain aspects that are so specific that major changes to an existing software package is needed. However, past experiences have learned this particular organization, to reserve for software changes, just in case.

The new software has to communicate with several other systems, from the same department and from other parts of the company. Also, the old, legacy system that will be replaced, contains valuable data about customers. This data is considered to be the crown jewels of the business and the new database should at least contain a larger part of this information.

-                     Changes to software

-                     Interfaces to several systems

-                     Data conversion (from old to new system)

The department itself has no IT people, so the installation of the system should be done completely be the vendor. However, the system will be maintained by the companies central IT department. As with all other information systems within this company, the central department should receive money from the business for this effort.

And there for the following items should be listed:

-                     Software installation by vendor

-                     Hardware installation by vendor

-                     General system maintenance IT dept.

This story will continue for a while. Think about all tasks needed to implement the system e.g. You will catch on pretty soon.

The results can be put into a nice table or spreadsheet. I put I or C for either cost or investment.

This entry was posted on Sunday, September 2nd, 2007 at 6:20 am and is filed under TCO.