CTO’s Guide to the Total Cost of Ownership (TCO) of a Digital Product
When it comes to evaluating technological investments, ROI is a standard practice. Yet, to derive an accurate ROI, factoring in the total cost of ownership (TCO) is paramount.
And for TCO calculation, there should be an evaluation of more than the initial costs – hard costs, such as software and hardware expenses, and soft costs, such as training and maintenance. Additionally, the tech purchasing process should be well-structured to account for these factors.
Remember, the goal isn’t merely to minimize TCO; it’s about maximizing the total business value.
TCO isn’t a one-size-fits-all concept. The strategy may vary. In this article, we will provide a standard practice that you can follow to calculate your organization’s TCO and make informed decisions.
TCO In a nutshell
“TCO is the total cost of acquiring, using, managing and withdrawing an asset over its entire life cycle.”
– Bill Kirwin, Analyst, Gartner
A digital product’s total cost of ownership (TCO) refers to the overall expenses associated with owning and operating the product throughout its lifecycle. It includes the initial purchase or development cost and ongoing expenses such as maintenance, upgrades, licensing fees, training, and support.
Why is TCO important for CTOs?
As CTO, your technology decisions directly impact the company’s valuation, so it’s crucial to be proactive and strategic.
However, constantly dealing with infrastructure issues can distract you from maximizing business opportunities, developing products, and achieving overall growth.
Managing the total cost of ownership (TCO) puts you in control, reducing reactive firefighting. It ensures your technology investments positively contribute to your company’s valuation rather than becoming unexpected financial burdens during critical moments like due diligence for future funding.
For instance, it helps you evaluate expenses throughout a technology’s lifecycle, which assists in making informed decisions to minimize unnecessary expenditures. It also lets you assess the environmental impact of technology operations so that your organizations can minimize energy consumption, reduce their carbon footprint, and expand the customer base to environmentally-conscious customers.
All in all, when considering questions like DevOps implementation, certifications, auto-scaling, or Kubernetes adoption, TCO analysis becomes a compass for decision-making. It aligns technical requirements with budget constraints, safeguarding the company’s financial health.
Types of costs that comprise TCO
TCO comprises 4 types of costs – development, operational, maintenance and support, and retirement cost.
- The initial cost of developing the product,
- The operational cost of running and managing it,
- The maintenance and support cost for updates, bug fixes, customer assistance, and
- The retirement cost for decommissioning the product.
#1. Initial development cost/Evolving product cost
Initial product development costs include software and hardware expenses, implementation, data migration, user licenses, training, external system interfaces, and customization.
As the product evolves, the cost keeps generating. First, it encompasses the salaries of developers, whether in-house or contracted, along with the training and tools they use. For instance, a web-based application‘s continuous evolution necessitates ongoing developer support, resulting in recurring personnel expenses.
Simform deploys experienced engineers and managers to the project while overseeing their management. This bypasses the employee training cost, which is often a concern with evolving product development.
Regulatory changes could also cumulate here. These expenses encompass compliance with ever-changing regulations, certifications, and ongoing product updates. By proactively monitoring and addressing evolving compliance requirements, you can reduce unforeseen costs, streamline development processes, and maintain a competitive edge in the market.
#2. Operational cost
Operational costs are often incurred while a software system is in production. It includes licenses for integrated libraries, platform subscriptions, and user training, among other factors.
Notably, the expense of software maintenance and support, either through annual contracts or ongoing obligations for custom solutions, plays a substantial role. User licenses, essential for off-the-shelf software, can grow with the expansion of user numbers.
At Simform, we offer our expertise in optimizing your licensing strategy, ensuring that you pay only for what you truly need.
Next, security costs are indispensable, particularly for externally visible applications. Implementing stringent access control measures could minimize potential threats.
#3. Maintenance and support cost
As the product matures, ongoing maintenance and support costs emerge. A major factor driving this is technical debt, which could manifest in various forms, such as poorly designed code, delayed bug fixes, or outdated infrastructure. Addressing them may involve revisiting and improving the product to meet customer requirements, which may incur costs related to code refactoring, infrastructure upgrades, and bug fixes.
And then there are costs related to software upgrades, high availability, security, and employee training.
Migrating users to new systems is underestimated, even though planning and a rough estimate for such transitions are essential. Downtime is another aspect that’s usually not considered. Other aspects, such as user and admin support and security enhancements, are also frequently underestimated.
#4. Decommission cost/Retirement cost
During the system retirement phase, calculating data migration and archival costs is essential for smooth transitioning.
The intricate process of application decommissioning also warrants more attention.
Moreover, there is a potential for ongoing post-retirement support costs. While these costs may linger after the retirement of a system, they represent an opportunity to maintain data integrity and ensure ongoing security for archived data, which can be a valuable investment.
From a business perspective, organizations need to recognize the impact of system retirement on their operations fully. While the transition phase might disrupt daily business processes, customer service, or employee productivity, it also signifies a chance for innovation and improvement. Additionally, costs associated with customer and stakeholder communication and change management should be seen as an investment in success.
Organizations must conduct comprehensive retirement cost assessments that consider both the technical intricacies and the broader business implications, ensuring a smooth and cost-effective transition.
How to calculate TCO?
Calculating TCO for a digital product is a crucial process that involves assessing all expenses associated with developing, maintaining, and scaling the product over its lifecycle.
Here, we’ve broken the methodology step by step, focusing on the role of the CTO and how their responsibilities change as a product evolves from MVP to scaling to hyper-growth stages.
Step 1: Scope determination
Often, we focus more on high-level business requirements and overlook detailed technical requirements, such as defining data models, API endpoints, concurrency control, data lifecycle, dependency update plans, etc.
Define the scope at different levels of the development cycle. For instance, when defining non-functional requirements (during the MVP stage) such as performance, decide which data should be cached and at what level (e.g., client-side, server-side, database).
There can be instances where the scope expands (adding features not part of the original plan). Managing it might involve seeking additional funding, extending the project timeline, or reallocating resources from other projects.
Hence, manage the scope creep to avoid scope constraints.
Expanding the project beyond its initial scope without proper evaluation can lead to budget overruns and an inflated TCO.
Step 2: Infrastructure and technology selection
Often, as CTOs, we feel that we have to find the latest technology. But the key is to understand our organization’s needs and the problem.
Thus, while calculating costs during tech selection, consider factors like scalability, interoperability, cost-effectiveness, security, flexibility, sustainability, and industry knowledge.
Do not overlook aspects like FinOps and cost categorization, as they are essential for maintaining the organization’s financial health. While implementing TCO best practices such as transparent cost allocation and budgeting, cross-functional collaboration among finance and IT teams, and cost-effective cloud resource management strategies, enhance the FinOps maturity model for financial sustainability.
Implementing a proper vendor lock-in strategy is also a prudent step and the most underestimated one.
Additionally, we should also pay attention to API strategy, integration complexity, and ease of use during tech selection, as it may cause data silos and hinder the adoption of new technology.
When adopting new technology, operating in a closed sandbox environment is wise. It limits budget and risk while retaining control and estimating parameters for the total cost.
International considerations, including compliance with local regulations, data privacy laws, and variations in taxation within target markets, should be on the radar, especially for global operations. Neglecting these aspects can lead to limited market expansion, decreased performance and latency, operational inefficiencies, and regulatory issues.
P.S. Retrofitting infrastructure for internationalization is not a good practice. It’s costly and time-consuming.
Step 3: Development and maintenance costs
Firstly, consider the costs associated with quantifying risk impact and tackle the blind spots there, such as dependencies, opportunity costs, and non-financial impact.
Acknowledge the importance of change management during technology selection. Mostly, while implementing new technologies or infrastructure changes, many technology leaders miss out on factors such as resistance to change, change fatigue, lack of metrics, and proper communication.
It’s highly important to communicate the reason and benefits of change to stakeholders and employees to minimize employee resistance and ensure successful technology adoption, which can impact ROI.
Dependency management is crucial, and so are its aspects like interdepartmental dependencies. Also, consider version, data, open source, and external API dependencies.
Technical documentation and testing strategies often get underestimated. Proper documentation ensures that your team can maintain and troubleshoot the technology effectively. Similarly, a robust testing strategy is essential to identify and fix issues early in development, preventing expensive rework or post-implementation problems.
Step 4: Security and compliance costs
Start by calculating security expenditures, including investments in firewalls, encryption, monitoring tools, and incident response teams, followed by audits, legal counsel, and regulatory adherence. Do not miss the factors like – the complexity of the technology stack, the sensitivity of the data, and the industry-specific regulations.
Also, emphasize on the architecture as the architectural decisions we make can significantly impact the cost of maintenance, scalability, and adaptability.
A well-designed architecture can enhance security by isolating sensitive data and providing precise access controls. Compliance requirements often dictate specific architectural elements, such as data encryption or audit trails.
Step 5: Monitoring and optimization
Observe real-time performance metrics, including server loads, network traffic, and resource utilization to identify bottlenecks and inefficiencies, and analyze costs related to hardware, software licenses, cloud services, and personnel.
Also, consider the Architecture Decision Record (ADR) and ensure it aligns with your organization’s goals and objectives. Deviations from the ADR lead to costly rework and hinder optimization efforts, impacting the TCO.
Maintaining strict governance over technology expenditures is essential to monitor spending, identify cost overruns, and enforce compliance.
Real spending is a tangible concern. We have to track actual expenses against budgets closely. The focus should be on maximizing the efficiency and performance of the tech stack as it would impact the TCO in the long run.
Calculating TCO for business requires extensive data from various sources, making it a tedious process. If done manually, the chances of human errors are high. Thus, the tools!
Tools for calculating TCO
Here are the most popular and utilized tools for calculating the TCO of a digital product.
|AWS TCO Tool||Estimation of total costs for running applications on AWS||Seamless integration with AWS services and data sources|
|Google Cloud Platform TCO Tool||Estimation of costs for running workloads on Google Cloud Platform||In-depth analysis of cost-saving recommendations|
|Microsoft Azure Cost Calculator||Calculation of costs for deploying applications on the Azure cloud||Integration with Azure services and cost optimization recommendations|
|VMware TCO Comparison Calculator||Comparison of on-premises infrastructure costs with VMware cloud solutions||Detailed analysis of cost differences between on-premises and cloud deployments|
|CloudZero||Granular visibility into cloud costs and usage||AI-driven cost anomaly detection and optimization recommendations|
|Cloudability||Comprehensive visibility and analysis of cloud costs||Customizable cost allocation and budgeting for different teams and projects|
|Apptio||Holistic view of IT spending across cloud and on-premises environments||Cost transparency through detailed analytics and reporting|
|Scalr||Cost management and optimization for multi-cloud environments||Automated policies and governance for cost control and optimization|
|CloudCheckr||Cloud cost monitoring and optimization||Security and compliance analysis alongside cost optimization|
|CloudHealth by VMware||Cloud cost management, governance, and optimization||Centralized management and optimization across multiple cloud providers|
TCO: A CTO’s dream legacy
Performing an accurate TCO analysis requires you to fit together numerous cost pieces, some of which may be scattered well beyond your IT infrastructure. The challenge is to find and include all these elements in the analysis.
However, all enterprises aren’t well-versed in tech or lack time for tech initiatives. That’s where they need a knowledgeable technology partner to minimize TCO and help in the growth plan.
Simform, a leading digital product engineering company, helps enterprises minimize the TCO of a digital product. We:
- Select the right technologies and frameworks to ensure your software’s long-term cost efficiency.
- Design a scalable architecture that adapts to your growing needs, reducing the need for costly overhauls.
- Optimize code for efficiency to reduce operational costs.
- Implement automated testing to catch and fix issues early, saving on post-launch maintenance expenses.
- Leverage cloud services to cut infrastructure costs, improve reliability, and enable quick scalability.
- Set up continuous monitoring to detect performance issues proactively and prevent costly downtimes.
- Conduct regular updates and maintenance of your product to enhance security and reduce the risk of expensive security breaches.
- Analyze user data to make informed product decisions, maximizing ROI and minimizing unnecessary features.