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The Hidden Costs of Acquiring New Software

A software vendor / selection trap?

The total cost of an HR, CRM or Accounting software project is typically two or three times (or even more) than the cost of the software itself. Most such projects are planned on this basis. However, the real cost problems - are the hidden costs – those unforeseen costs that just creep out when you are least expecting them.

It starts with the software vendor’s additional costs (after all they are in business to make money) and carries on throughout the implementation.

One solution is to identify the total cost of ownership, not just the software, as clearly as you can prior to acquisition. If you establish and compare the total costs associated with each software package for 1 year and 5 years from the date of acquisition, you will have a much better idea of what to expect. Fairly obviously, a low cost for software does not necessarily mean that it is the best overall value.

Another solution is to look out for potential hidden costs and either include them or a contingency, and then manage them as best as possible at the time they occur. To help, here is a (not exhaustive) list of such potential hidden costs:

 

Watch out for these hidden software costs:

The software application licence - the modules you really need, rather than what you would like to have (or be talked into), what the prices are based on - number of concurrent system users, number of employees or records (eg for Human Resources Software), number of transactions or a mix of these? What are the different price bands? How it will work out for your organisation?

Software rentals – similar to above.

Bespoke software developments or features you need, that require additional programming by the vendor.

Other software licences you might also need – just to run the software application eg new or additional database software licences.

Hardware upgrades eg new or upgraded servers, pc’s.

Network upgrades.

Training costs – number of days and day rate. What is the typical amount of training required for the average customer and specifically, what would be required for your organisation? What is the cost of setting up a training facility on your site? Or to use the vendor’s facilities?

Vendor support services fees eg for interface development, report writing, implementation consultancy assistance.

Other support services eg contractors, temporary staff (plus their agency fees) to assist with the implementation.

Annual licence fees – are these charged? And if so are they on top of, or instead of annual maintenance charges?

Annual maintenance charges – for all software, database and hardware you will be acquiring. Are there different levels of support at different price bands? In addition, how do you move from one band to another? Also, what are the annual charges based on – the price you pay or list (higher) prices, plus what will they increase by each year – a fixed amount or %, or by some other criteria?

Upgrade charges – are there additional charges (over and above the annual maintenance) for major software upgrades?

Travel and accommodation, or out-of-pocket, costs incurred by vendor consultants whilst providing training or consultancy on your site?

System usage costs or fees – are these charged and if so what are the price bands?

On premise or cloud based storage costs for your data.

Backup and disaster recovery costs.

 

Just ask the questions:

  • What other costs will we need to incur (now and in the future) to run this software?
  • Do the software vendors have a list of charges, price lists or will they provide details?
  • Do the prices quoted - include/exclude VAT, or sales or state taxes?
  • What currency are the prices quoted in? What exchange rate does the vendor use, if list prices are say in US$ and they are selling to you say in the UK? Is it US$1 = GBP1, or a more reasonable reflection of current exchange rates?
  • What are the payment terms? Do they accept stage payments?

 

You may end up with a long list of potential software costs that previously were hidden. But, it’s not all bad. Forewarned is for armed and you have the opportunity to negotiate these, should you wish to do so.

 

For more IT project proposal information visit: Why change your present system?  / Project scope checklist / IT project proposal / Proposal format / Basic roi calculation / Return on investment calculator / Maximising project ROI / Project budget / Project budget template / Proposal evaluation sheet / Software selection acronyms

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