This article was written as an expansion of our white paper “Choosing Sustainability Management Software for your Business” published in July 2011. Enjoy:
We touched on the TCO – Total Cost of Ownership – in the main white paper, but since the cost is such an important part of your decision making process we felt the need to dig into a little more detail. Be sure to check in with your CFO, your CPA, your financial advisor, or with whomever else you typically engage for financial input as well. They’ll definitely have a view of the important costs that are specific to your situation. We’ll break the Total Cost of Ownership down into four main areas: Acquisition, Implementation, Maintenance/Enhancement, and Growth.
Acquisition Costs...
...include all the money that you need to spend on purchasing your software solution. They may include direct payments to your primary software vendor as well as any related software that you may need to purchase a license for. Ideally, you’ll get all the software costs for the enterprise carbon accounting software rolled up into one cost from your vendor, but if you decide to add complementary packages or tools, they may cost you extra.
Any hardware costs would also fall into this category. You can avoid these if you choose a Software-As-A-Service (SaaS) model, but if you need to purchase new equipment for your end users – maybe laptops or tablets/phones for field data entry or memory upgrades for your existing equipment – make sure you include these costs in your TCO. Your analysis should also account for any taxes and shipping/handling charges on hardware and software purchases. You will most likely be able to capitalize these costs as they are related to the purchase of company assets; they may be eligible for tax credits or other incentives. Be sure to check with your accountant for the correct treatment.
Implementation Costs...
...include all the effort necessary to install, set up, configure, test, train, and otherwise get your software ready for launch. You may need to pay your vendor or a consultant to set up and install the software. You also may need to allocate time for your internal associates or employees to do work as part of their day job.
This internal staff cost is important – your folks may not be able to just absorb this extra work alongside their regular responsibilities. This cost may be payment for temporary labor to come in and cover the daily office activities, or it may help you determine that you really do need to leverage your vendor or consultant to do more work. Performing your initial data load and set up, testing all the reports and data interfaces, and training your users on how to use the tool, create reports, and otherwise maintain the information, are all critical. You may even need to spend time (and money) educating users on why it is important to correctly track your environmental impact.
Aside from all the labor costs, you might also need to set aside money for travel (to and from training, vendor locations, etc.), for incidentals (such as food and snacks for meetings and training sessions), and even simple things like office supplies to help you get the implementation done. Similar to acquisition costs, you can most likely capitalize implementation. However costs for tasks like training and data conversion may not be eligible for that treatment. Again, check with your accountant for the correct handling of these costs.
Maintenance Costs...
...cover everything related to your core software system’s ongoing maintenance and enhancement that comes after the initial launch. In some cases, your ongoing maintenance fees will be bundled with your upfront purchase – if they are, be sure you are specific about what period they cover (i.e. one year, three years, etc.) and what the correct accounting treatment is for these costs. For planning purposes, your annual software license is approximately will typically be 20% of the upfront purchase costs of the software. This may vary depending on a number of factors, including whether or not you are on a subscription model, so be sure you identify this with the vendor up front.
Once the initial maintenance period is over, you’ll also want to make sure you account for any increases in fees that may occur. You don’t want to get locked into using a system that suddenly escalates out of your budget a few years down the road because you didn’t get things spelled out up front. Things like bug fixes, troubleshooting, and support are also be covered under this category. Maintenance costs are most likely to be operational expenses. If they’re bundled with your upfront purchase, be sure you know how to split them out appropriately – when you talk to your accounting folks, they’ll thank you for that.
Enhancement Costs...
...for the software are other types of “future costs” that you more than likely will not pay up front. They’ll come into play when your software vendor releases version 2.0, 3.0, X.0, etc. of your software solution. You may have the option to stay with your current version, but then you’ll miss out on all the new features, enhancements, bug fixes, and other goodies that your vendor has bundled with the new software. Your best bet is to get a clear understanding of how often upgrades – that aren’t included free of charge – will come along and what the cost will be. You should also be sure to capture any accompanying “implementation” costs that may be incurred. Depending on the nature of the enhancement, you may be able to capitalize the cost as it will relate to an asset versus an operational cost, but once again be sure to check with your accountant.
Growth Costs...
...are the last major category of “future costs” that you should consider. These costs are incurred when your usage of the software solution increases. Maybe you start out with only a handful of users of the platform, but then want to scale up and have everyone in the company use the tool. You may need to go from a “seat license” (for a single user) to a “site license” (for everyone at a single location) or an “enterprise license” (for everyone at your company). Know these costs so they don’t break your business case down the road.
You will also most likely increase the amount of data that you store over time. This may be due to the addition of more sites, more data elements, or just more detail on your existing information. Be sure you know when you’re likely to exceed a price threshold so that you can account for it in your planning process. You may not be able to account for things like mergers and acquisitions at the present time, but you should have some idea of how you expect your business and usage of the system to grow over the next several years from your basic business planning, so be sure to include those details. Depending on the specific driver for these costs, the accounting treatment may vary between capital and operating expense – try to provide your accountant with specifics when you talk to them.
Cost Timing...
...is important to each of these categories. Make sure you do some yearly projections so you know how much you are going to spend and when. Your acquisition and implementation costs are most likely to occur in a relatively short time frame (maybe even in a single calendar year). Your maintenance costs will almost certainly kick in at the start of Year 2, if not earlier. Enhancement costs might show up yearly, beginning in Year 2 or Year 3. Growth costs will hit whenever you hit those thresholds – try to make sure you’ve at least given yourself a year or maybe two of room in your initial contract. You will need to consider the expected lifespan of the asset to determine just how many years forward you need to look. A typical time frame for a smaller system may only be three years, but for a large enterprise level system that you have integrated with other major systems, you could be looking at a horizon of five or even seven years. If you were wondering who could help you with that determination, you probably can guess who to ask: your accountant!
Now that you’ve read this article, tell us what you think! And be sure to check out the full white paper.