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I am sure we can all relate to a purchasing decision which later turned into a money pit, such as purchasing a car or house. During my youth I would often go boating with a friend whose father owned a boat. Often the boat would break down—usually just as we got to the middle of the lake. We would spend hours drifting in the water while his father would try desperately to resolve the problem. Eventually we would be towed to the marina where the battery, an electrical part or some other mechanical part would be replaced or repaired. One day his father told us what the word “boat” represents: “Bring Out Another Thousand [dollars].” I am sure boats are built better these days, but it left a lasting impression on me. This experience has kept me from purchasing a boat, due to the potential hidden costs behind boating. Later, I learned firsthand about hidden costs when a reverse osmosis water purification system was installed under our kitchen sink. After the installation, I learned custom filters needed to be replaced by an expert repairman a couple times a year, translating into several hundred dollars a year, forever.
Unfortunately, we live in an age of supplier hooks. That is, suppliers would like to hook you on their products and services. From the beginning, the computer industry has been rife with these hooks. At first, it was the hardware companies, now it’s the software companies. Computer hardware has become a commodity these days and no longer carries the painful hooks of the past. On the other hand, software is a long way off from being a commodity, so plan on big hooks and nose rings to software suppliers. This is especially true with enterprise software, which includes ERP, SCM, CRM, WMS, PLM, etc. for all kinds of industries. Enterprise software is the backbone of most businesses.
Enterprise software is not only expensive to purchase, but comes with significant hidden costs.
Before purchasing an enterprise software product, make sure you have a handle on the hidden costs. The initial hardware and software cost is usually small compared to the hidden costs. I have seen hidden costs balloon over eight times the initial cost of the software. There is no escaping, all enterprise software has these hooks and hidden costs, including small products. Figure 1 illustrates the old iceberg theory (or should I say “law”?); namely, most software costs are hidden below the surface. The initial software and hardware costs are just the tip of the iceberg. Figure 1 lists most of the hidden costs required to implement and manage an enterprise software product.
Selecting an enterprise software product with low hidden costs will significantly reduce your total cost of ownership.
Nearly all software suppliers will claim their product has low hidden costs. Some of these suppliers may even have references to support this claim. However, don’t be fooled, ignore the marketing hype, and make sure you get a good grip on the real hidden costs yourself before making a purchasing decision.
HIDDEN COSTS BEHIND SOFTWARE
The following list defines the hidden costs listed in Figure 1, along with some possible suggestions and pointers to help in the reduction or elimination of these costs:
Dual system requirements
Make sure you budget in enough hardware and IT support to manage dual copies of the software product and database on multiple systems. This means you may have one or more copies of the entire software and database on totally separate systems. The reason for dual systems is primarily due to implementation, upgrades and support requirements. You will need to build and maintain at least two complete copies of the software product and possibly more. One copy will be for your production environment, and another copy for training, testing, development, upgrades and de-bugging. (Usually this requires three copies.) Also supporting these dual systems could be significant. And, if you try to avoid these costs, you will pay in lost or poor productivity during and after the implementation.
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