Unless you have a holistically quantified picture of all (and I mean ALL) the operating, personnel and acquisition costs of your shiny new software-as-a-service (SaaS) purchase then you are overspending, likely by a lot.
How Much Should SaaS Technology Cost?
SaaS products should result in zero (R 0.0) Direct Costs, such as software maintenance, development or management costs. Its self-service functionality requires sufficient know-how from your support and administrative staff.
Overspending on SaaS Technology is more Common than You Think
Unfortunately, I am seeing companies, big and small, overspending on their SaaS technology implementations. With larger companies racking up a spending surplus that runs into the tens of millions.
I am not underestimating the difficulties associated with accurately predicting the time and cost of implementing a SaaS technology. Particularly with the ever-maturing product landscape.
The longer the period and the bigger the company, the trickier it gets. Even the vendors you’re buying from aren’t always able to accurately calculate this cost. I know this firsthand, having spent close to a decade on the vendor side.
But just because it’s tough to do, doesn’t mean it can’t be done. Throw away that defeatist attitude and enter the solution mindset. Enter the Total Cost of Ownership (TCO) analysis.
What is a TCO Analysis?
A Total Cost of Ownership (TCO) analysis is a metric that determines the overall cost of buying, implementing and maintaining an asset or resource. A TCO analysis covers three costs; acquisition, operating, and personnel.
Crucially, a TCO analysis considers the hidden costs that are not always apparent, or worse, deliberately kept from customers when they decide to buy.
A TCO analysis considers the entire lifespan of an asset, which might stretch over many years. It’s an all-seeing eye that considers every cost associated with an asset or system, offering a holistic view of the financial landscape.
A TCO Analysis Looks Beyond the Tip of the Iceberg
The iceberg is a metaphor for the information your organisation is gathering. The exposed ‘tip’ that sits above the water’s surface is typically the information that is apparent to purchasers before buying.
Much of the iceberg that sits below the water’s surface represents the large body of information that is not always apparent to purchasers.
A TCO analysis aims to provide buyers with information about the entire iceberg, below and above the water’s surface, before making a purchasing decision by providing objective and impartial industry expertise and information. Such expertise and information is intended to be comprehensive and in the best interest of the purchaser, not the vendor.
The quality of the output depends on the quality of the data input sources. Interrogate your data. Ask questions. Speak to respective stakeholders. TCO analyses are not meant to be punitive, so don’t cast blame. Rather ask questions and ensure you gain a deeper understanding.
Ironically, vendors that can provide this information to clients set themselves apart from the pack.
Using a TCO Analysis Before vs After Purchasing
Before Purchasing
In a perfect world, a TCO analysis should be conducted BEFORE a purchasing decision is made. Include it as a requirement in a procurement process. List it as a prerequisite in your RFP assessment brief and get the vendor to do the heavy lifting.
If you’re a CFO, procurement officer, or the division head who holds the purse strings, ensure that every business case includes a TCO analysis.
After Purchasing
Unfortunately, we don’t live in a perfect world and often companies review their procurement decisions after the fact. Well, that’s also okay. In this case, hindsight is your friend. A TCO analysis can be used as a retrospective analysis. When looking back, there is more actual data to analyse. In this way, a TCO analysis will help you calculate if you continue with a particular vendor, or if you change your approach somewhat.
Benefits of a TCO Analysis
The direct and indirect results of a TCO analysis are game-changing for any business because they help you make better and more informed buying decisions. They also help you to:
- Buy what you need and for the best price
- Save time and money
- Increase usage and adoption of your chosen SaaS technology
- Increase the business impact and drive great ROI
Ultimately you will enhance your reputation and avoid the regret of making poorly informed buying decisions.
Time to Conduct a TCO Analysis
Conducting a TCO analysis for your business is the most effective way to prevent overspending. In a larger business, it may make sense to work with an external consultant to maximise efficiency and ensure objectivity.
