The importance of Total Cost of Ownership in Social Housing Technology
Over the years, my team and I have carried out many procurement and software selection exercises of very expensive housing systems for landlords. One thing we have seen is that very often you will come across terms and questions such as ‘We would expect to see true Value for Money from your software’. Or ‘You must demonstrate how we would see VFM or cost savings’. What we don’t hear very often is ‘What is our Total Cost of Ownership for this particular system?’
The big problem here is that what value means for the organisation is rarely qualified and quantified in the procurement itself, or even afterwards as those implementing seek to find out what the total cost is and what return they will get to justify their (over)spend.
For as long as I can professionally remember, I had it drummed into me that, as an IT leader, Total Cost of Ownership (TCO) is the most important thing you can get right in relation to cost and budget management. TCO is the total of ‘all’ costs related to and incurred through the use of software and is a critical part of ensuring you get Value for Money (VFM) and any reasonable Return on Investment (ROI). They are all kind of related.
But, and it’s a big but (and I cannot lie), the housing sector does not use TCO properly. In fact, I only see it used on very few occasions. This is a real shame, as technology costs a lot. The big question therefore is, if you want to consider the true potential value of a product, why does the sector not make more of an effort to work out he real costs?
How to start looking at your TCO in three simple steps
Step 1: Classify your software solutions
The first exercise you may consider is classification of your software solutions. At present, software you have will fall under one of three categories:
- Off-the-shelf software. Typically runs on-premises or a hosted data centre. Think of your current Housing Management System.
- Cloud, SaaS software you lease/subscribe to. Think 365, Salesforce or the likes.
- Bespoke/custom software developed by a third party, an internal team of developers or a partner organisation.
Step 2: Classify the types of costs associated with each of your software solutions
The second exercise is to consider the types of costs applied to the software types you have above.
Generally speaking, most people will break down these costs into three categories. These categories follow the life cycle of a system within the organisation:
- Commissioning costs
- Operational costs
- Retirement costs
Personally I would argue there is also a fourth, procurement, but I will leave that out of the overview right now, as otherwise I might as well write a book. As the plural of ‘costs’ probably gives away, each of these categories can also be broken down into various categories. This brings us to step 3.
Step 3: Classify and quantify the types of costs associated with each life cycle
The third and final step is to break down the activities and elements involved at any of these stages per sofware solution. This ranges from any hardware needed to run the solution to ongoing training needs for your staff and making sure your data are protected.
The list can be very long, and that might be scary. But, if you want to start to understand what value your systems are bringing to your organisation, you will also need to know what they are costing you; to the very last penny!
You can only see and talk about the value of things you are honest with yourself about Total Cost of Ownership
This has been one of those articles that was meant to be a quick overview of the importance of Total Cost of Ownership and the value of software. However, I got a bit carried away, and could have kept going.
It’s a subject DTL Creative know a lot about, and I feel it is one of those areas that, while it is incredibly important, it is often underplayed in the sector.
Software is complicated in its entirety. It is complex in its architecture, maintenance and all the costs involved with that. However, it being complicated is not an excuse to glance over it or hold up a wet finger in the wind when setting budgets, writing procurement proposals and reporting on the value a system has brought to the organisation. Indeed, your IT set-up can and should be seen as one of the most important assets you have; so why would you not put in the effort and measure its total costs and the value it brings to not just you, but also your stakeholders.
In the end, IT is about serving customers. These customers are not always the systems users as some would expect. It is about the end customer and in the case of Social Housing, it’s the tenant that needs to see the benefit. It is the tenant that must benefit, to be safe, to be warm and to be confident that somewhere down the line the housing provider is using software to improve their lives.
Getting Started: Common costs you need to know to understand Total Cost of Ownership
The following sections discusses per category from step 2 the most common costs associated with each life-cycle. This list is, of course, not exhaustive. So, if you know there’s even more to it, add that to your spreadsheet as well!
Costs in this category are all the costs incurred when implementing new software. These include initiation and start-up costs. I don’t like to teach folks to suck eggs, but it is worthwhile listing just some of the basics here.
Software such as housing management systems usually have an up-front software cost plus user licenses, based on assets, users, etcetera. But make sure you understand them fully.
As far as hardware is concerned,the cost of servers and applicable, dedicated, storage to run the software is obvious, but what about and other costs like backup and disaster recovery.
These days, very few systems work in isolation. This means they require interfaces to other systems to reap the overall benefit. You will be very likely at some point have to pay to get one system to talk to another. This could be from a third party asking for development time or internal need to assign resource, contractor, or to buy some development tools. Everything is always possible here, but at a cost, and it’s not always straight-forward.
Sometimes forgotten, the cost of training users applies to all types of software, with varying degrees of need. The training may be internal costs if you haver built it yourself or external costs from suppliers.
Different landlords have specific ways of doing things, so account for this in any customisation you may need to off-the-shelf solutions. It may simply come down to a few small tweaks, but perhaps it is a larger more bespoke adaptation. Whatever it is, it should be calculated in the TCO.
Project & Implementation.
The cost of building and testing software is one thing, but remember the actual resource needs to be accounted for. You may backfill, employ specialist skills or consultancies. There are also costs of setting up things like backups, contingency plans, backups and so on.
Data is a big one. We know that a great deal of suppliers will only help you part of the way in data migration. The cost of moving data from the legacy system to the new system can soon add up and increase your Total Cost of Ownership.
Costs in this category are all the costs incurred in the day to day running, maintaining and using of any systems and applications you have, both hardware and software.
Software maintenance & support.
This obviously does not apply to cloud software. However, for software products you have bought off-the-shelf you will have signed up to support agreements that may or may not include patches, version releases and bug-fixes. The small print is the important aspect here. Know what you get and what you don’t get and cost accordingly in your TCO.
I won’t go into Escrow agreements here, but you should know if you have one or not. I’m personally not a fan in case you are remotely interested.
For off-the-shelf software, as the number of users grows in the company, new licenses must be purchased. If the number of users decreases, there are no refunds. For cloud software, licenses are typically priced per month, although they usually require an annual contract. Note that if the number of users increases, this cost increases. If the number of users decreases, this cost may decrease but often only when the contract is renewed.
No matter how it is provided, helpdesks and administration is a must. You may have analysts and developers the system as well. One option here is to calculate costs based on user numbers, and factor in the costs of managing them either all-in or as department service costs.
From time to time, you will have new users, new starts, or perhaps something bigger like a merger where hundreds of new users find themselves with new software at their fingertips. They will need trained, so where you can budget, where you can’t add it in during the years spend.
Adaptations and Enhancements.
Things change, it’s a matter of fact. Sometimes it can be regulatory things such as Decent Homes, it could be a new control such as GDPR or perhaps some company restructuring. Whatever it is, it will more than likely require some software changes.
Off-the-shelf software will have upgrades over its lifetime. They can be time-consuming, risky but also costly.
Disaster recovery & Business Continuity.
The provision and cost of a backup strategy is one thing but so are things like testing. Have you a strategy and cost plan in place?
Environment & Sustainability.
What about electricity/power, environment and sustainability? The costs of running the software in your server room like power, cooling and floor or rack space. You can add on security, alarms, suppression systems and so on here as well to calculate how the systems you use affect the environment.
Your finance/accounting department will love that you do this. Writing off the capital cost of the software and the hardware it runs on is very important but often overlooked. You obviously can’t do this in cloud-based services.
The costs of keeping your systems secure is not just in the code and the permissions of users but also applies to how you manage cost apportionment to firewalls, anti-virus etc. What about penetration testing. Have you thought of that in your TCO model?
From time to time, you will cease to use some software. A fancy word for this is retirement. There are costs incurred when retiring software that will add to the Total Cost of Ownership. However, as well as the costs in transitioning to a replacement, some companies do not take into consideration that retired systems can still incur ongoing costs.
Accessing and Storing Historical Data.
As mentioned, data is a specific area where you may find it expensive to migrate data out your old and into the new system. While you may have decided against migrating specific (often transactional data) directly into your new application to save costs, there are various reasons to keep those historical data available somewhere else, not in the least for legal and regulatory and compliance purposes, but also to ensure that any ongoing chased debts are not lost.
Whatever the reason, if you don’t migrate it, you may have to pay to access it. Like all the specific areas in this article, there are more details to consider, but as you will see it is a large and important area worth serious consideration. Because, well, let’s be honest, how often have you seen existing suppliers be helpful in such areas. You have just gone to their competitor, so why would they ensure the data from their old systems will remain available to you for free? So, decisions need to be made and some of these will cost money that should be included perhaps in the TCO model for the new software.
Parallel Running of Legacy System(s).
Another example is a situation where legacy software may have to run in parallel to the new system for a set period, which, while often forgotten about, must also be costed.