7 Tips for Understanding the Total Cost of Ownership When Acquiring Applications
Cited in a study that the technology firm CNET conducted, roughly 49 percent of IT projects suffer from budget overruns, and 47 percent suffer higher than expected maintenance costs. It’s imperative that companies identify and properly plan for all expenses associated with replacing a business application, such as an order management system or warehouse management system, to avoid these costly mistakes. Here are seven tips that we have extracted from years of order management system and warehouse management system consulting projects to help you go about this process.
1. When considering replacing your order management system or warehouse management system, ask yourself the following questions during the due diligence process:
- What applications will be considered, and what functions are required?
- What are the major milestones and time frames necessary to complete the project?
- What’s the total cost of ownership necessary to complete the project?
2. When asking a vendor to submit a formal proposal, include all the vital information necessary to receive a detailed proposal. For example, in the case of an order management system, vital information includes, among other things:
- Peak and average figures for the number of concurrent users;
- Order volumes by month, with the peak week;
- Average lines and units per order; and the
- Number of customer records.
This information isn’t only necessary in identifying the licensing, but also the proper sizing for application and database servers.
3. Analyze the vendor proposal painstakingly. For items such as training and implementation services, understand the number of days being proposed and what roles or tasks will be performed by the vendor. Be careful of terminology like “the normal number of training days are X” or “the standard project management days are X.” Make sure the “typical” or “standard” days are sufficient for your order management system project.
4. Understand the vendors’ license maintenance and support plans and when payment is due. Many vendors charge these fees once the application is delivered. Some maintenance plans can be as high as 20 percent of the MSRP or originally proposed license fees.
5. From an application licensing perspective, review the pricing model and any optional modules that may be necessary to support the functionality within your business. If the vendor is supplying the hardware for the application and database servers, be certain the hardware is sufficient and budgeted for, including the necessary hardware upgrades if optional modules are added later or if the licensing forces the hardware into major upgrades.
6. For program modifications or integrations to another order management system or warehouse management system, provide functional specifications for the vendor to submit a formal proposal. While the vendor responses may only be estimates, the more detailed the specifications, the better a vendor can estimate the expenses. Don’t wait until after the project is approved to get these expenses.
7. So far these expenses have focused on vendors’ costs and haven’t addressed planning for internal expenses. Be careful, because internal expenses are usually less budgeted for and can lead to project overruns very quickly. Travel expenses are one example of internal expenses to potentially budget for. It’s often necessary to travel to and from vendors’ facilities, as well as travel expenses for the vendor to be on site. These expenses can be as high as 15 percent to 18 percent of the total services for the project. Be aware, some vendors charge a travel fee if the travel is over a certain number of hours or they charge cost plus 2 percent to 3 percent.
Other internal expenses to consider budgeting for include:
- an increase in payroll or overtime to complete the project;
- the hiring of temporary labor or outside resources, such as consultants or programmers; and
- upgrades to other network hardware or the rewiring of the internal network.
Formalize a full budget before proceeding with your order management system or warehouse management system project; being sure to build in sufficient dollars for items such as services, programming and training that may not have been sufficiently budgeted for by the vendor. By clearly defining your budget, you can avoid being one of the 49 percent who exceed their IT budgets.
If you’re interested in discussing your order management system or warehouse management system project with a consultant, contact Jeff Barry at jbarry@fcbco.com, or call (804) 740-8743. F. Curtis Barry & Co. is a national consulting firm that works with eCommerce, catalog, retail, manufacturing and wholesale distributors on projects focusing on supply chain strategies, order management systems, warehouse management systems, inventory management, third party logistics, and to reduce freight costs.
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