Changing software solutions can be a challenging game. Do we make the right choice? Does it contain all the functionalities we need? What will the costs be? Because when opting for a new software solution, the main reasons are to increase the productivity, meet customer demands’ and to reduce costs. Costs you make in the logistics process but also when it comes to your investment itself. In the past couple of months, I've been talking with many companies in the 3PL industry: Cold Stores, 3PL Warehouses, Freight Forwarders, and Road Transportation.
Throughout these conversations, one question that comes up every time is “How much does it Cost ?”. A valid question, because people are on the point to make quite an investment. The thing is that to make a sound choice, the cost of the system isn’t limited to the license, and installation costs. A business needs to look at the Total Cost of Ownership (TCO).
Total Costs of Ownership (TCO): In supply chain management, the total cost of ownership of the supply delivery system is the sum of all the costs associated with every activity of the supply stream.
So, how do we calculate the TCO in IT? Well, it's a matter of calculating Direct Costs but also Indirect Costs throughout the entirety of your software systems.
To make things a bit easier and help you on your way to make a sound choice on cost when deciding to migrate to an integrated system vs. stay on "Low Cost" Systems, here are some things to consider.
To calculate the TCO, take the following 4 cost sections into account:
- Initial licence purchase costs
- Implementation costs
- Annual recurring costs
- Opportunity costs.
The first three cost types are Direct Costs, and the last Opportunity Cost is the indirect cost. To keep things simple, we’ll concentrate in this blog post on the direct costs. The next blog posts will talk about each opportunity costs individually, which can be a bit more challenging to calculate.
To calculate the Direct Costs, we’ll follow these below steps
1) IT Landscape
To start, make a list of your IT landscape. Your IT Landscape is all the software you are using and potential software in the future. For a 3PL warehouse, this list might look like the following :
- Accounting software
- Website for Customer portal
- RF scanners
- Mobile app for taking pictures of damaged stock
- Mobile communication with truckers
- Reporting tool for management reports
- Integration tool
2) Initial Licence Purchase Costs
The license purchase costs are only to be calculated if you are looking into an on-premise solution. If your solutions are on the Cloud, it means you are renting the solution at a variable monthly cost. If this is the case, we will include the Cloud license costs in the Annual Recurring fees section.
For each software system above, pull out the cost for purchasing these licenses or the expected cost if you are not already using this software within your company.
Depending on the software provider, this may include a base cost + a cost per user + a cost per module.
3) Implementation Services
Implementation costs are all the effort put into analyzing, configuring, developing, testing, data migration, and the go lives of your software systems. This includes the costs your software supplier has charged to you, but also your team's time into implementing the systems.
3.1) External Costs
For each software system above, pull out the total cost of implementing the system that was charged by your software supplier. This cost is everything which is linked to labour from your supplier, meaning business analysts, developers, architects, etc. These are the total charges all of your suppliers charged you to implement the system.
3.2) Internal Costs
Another cost that must be taken into consideration is your internal cost for implementing the system. How many hours have your super user employees invested into configuring and testing the system ?
Typically speaking, for every hour you pay to your supplier, your team invests 2 to 4 hours. If you ask for less implication from your software supplier, the more your team will need to work.
4) Integration Costs
If your IT landscape currently includes multiple software, you must also include a cost for integrating these systems together. Or else, there will be a high labour opportunity costs which we will talk about in another blog article.
If you calculate these three costs for each software you are currently using, but also an estimation for the potential software you will be using, you will get a total amount for your software landscape.
5) Annual Recurring fees
Annual recurring fees are all of the fees that are charged on a recurring basis. Examples of these costs are:
- In an On-premise scenario:
· The annual fees are typically called Enhancement fees or Maintenance Fees.
· HelpDesk or Support costs: These are the annual charges to have access to the support team on your supplier's side.
· Update Fees: Does your current supplier charge you for updating your system to the latest version ? Some systems haven't been updated for the past 10 to 20 years. There is a high opportunity cost related to having software systems which aren't up to date. We’ll dive into this topic will in another blog article. [DT1]
· Last year's unexpected charges: Have you had unexpected charges last year with your suppliers ? Were these charges associated to do changes to the configuration of your system?
- In a cloud scenario:
· The monthly license costs.
· Optional: - Last year's unexpected charges: Have you had unexpected charges last year with your suppliers ? Were these charges associated to do changes to the configuration of your system?
The calculation formula:
Once these annual recurring costs are established for every software in your IT landscape :
· In an on-premise scenario: multiply the annual costs by 5. In a cloud scenario: multiply the license costs by 2, and the rest of the costs by 5.
The reason is simple : in an on-premise scenario, if you do not maintain your system annually, at the pace technology is moving, chances are that you will need to change your system in the next 5 years to stay competitive on the market. But, when EDI file transfers were common 5 to 10 years ago, today, if a system does not support Web API, it is heading to be left out.
A cloud scenario is different since the cloud solution also includes hosting, antivirus, servers, etc. When comparing cloud to cn premise, Microsoft's guideline is to multiply the cloud monthly costs by 24. This article is a guideline for calculating the total cost of ownership, and does not compare cloud vs. cn premises. One great article was written by Greg Deckler and can be found here that compares both.
Once all these costs are calculated for every software in your IT Landscape, sum it all up and you get the Total Cost of Ownership for Direct Costs only.
Want to learn more? In the next couple of weeks, I will post an article for each indirect cost. Want to learn more about the possibilities of 3PL Dynamics in the meantime? Let's take a couple of minutes to introduce and get to know one another. Excited to learn more about business and what your objectives are for this year. Feel free to reach out to us or schedule a quick meeting.
We, at PL Solutions, are a Microsoft partner and we focus specifically on the 3PL industry. We accomplish this through our tight partnership with Boltrics for which we are the North American reseller of the 3PL Dynamics ERP Suite. This software system is a modular ERP system which includes a WMS, TMS, and FMS as well as an accounting system, CRM, EDI, Mobile platform, RF Scanning system, Customer portal, and advanced functionality such as voice picking, automated warehouse integrations, and more. Customers can implement one or many modules in different phases. When you look at the TCO, including Indirect costs, 3PL Dynamics has a total cost of ownership much lower than any other system out there for a 3PL company.
If you wish, I have an excel spreadsheet that you can download right here