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Technology: Cost of Ownership

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types of cost

customer concerns

addressing concerns

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cost of ownership: a supplier's perspective


The cost of ownership, or the perceived cost of ownership, is a significant factor affecting sales of your product to new customers, as well as add-on sales to existing customers. This is therefore an important aspect of your product management. 

Typically, the customer may not have the same perception of the cost of ownership as you do. You may think that the customer's perception is unfair. But it still raises the question: what are you going to do about your customers' unfair perceptions of your product?


This page addresses the cost of ownership of large technology products, such as large software products. It is written from the perspective of the product vendor, but is also relevant to product users.

Case history: We did some work in this area within a large software product vendor. The work was triggered by an extensive Customer Satisfaction Survey, which revealed that many of the vendor's customers perceived its software products to have a rather high cost of ownership. We were engaged in working out a strategic response to this perception.

On this page, we analyse the typical costs of ownership, and the typical areas of perceived problems with cost of ownership, and identify some areas in which some improvements may be possible. Please contact us to find out how Veryard Projects can help you.

definition

A business case for the acqusition or continued ownership/operation of some technological products or services usually involves some element of cost-justification.  This means that there is a favourable balance of benefits, costs and risks, however these may be calculated.

For these calculations, the costs to be included in the equation are often considerably larger than the total amount paid to the technology supplier, which in turn may be considerably larger than the initial purchase price.  The term cost of ownership is used to refer to the total expenditure required for the effective deployment of the technology, usually calculated over the expected lifespan of the technology.

(A supplier with many different customers will usually find that no two of the customers calculates these benefits, costs and risks in exactly the same way.  However, if the customers talk to each other, or if they are subject to common regulations, then there is likely to be a reasonable level of consistency )

types of cost

 
Product Software licence purchase.
Maintenance Annual software maintenance costs.
Training Cost of providing formal training and on-the-job support, both by external consultants and by dedicated internal support staff. 
Provisioning Acquisition of hardware and software to run your products. Include any mainframe or network charges.

Note: effective use of some PC-based software products requires a top-specification PC. Each version of your software may make additional demands on the hardware. Your users may have to upgrade their hardware more frequently than they had planned.

People Cost of receiving training, and other personnel costs associated with the implementation of your product .
Development costs Costs of running the development programme, including application planning, development, installation and coordination. Include consultancy support.
Operational costs Costs of running business processes or applications developed using your products.

Note: if use of your products enables the customer to operate more complex business processes, or to develop more sophisticated applications on more expensive platforms, or to develop more highly networked applications, the customer may consider the costs of the operational platforms and networks as part of the cost of ownership.

Poor quality costs Costs incurred by poor quality products and services from the vendor, or by poor management by the customer.

customer concerns and complaints

 
Expensive The predicted cost of ownership cannot be justified by the expected benefits to the customer organization.
Appears expensive Much more expensive than apparently similar products.
Difficult to manage The costs of ownership are spread across many different department budgets, and the customerís management reporting system does not allow these costs to be linked to the benefits.
Out of control In some areas, the costs escalate automatically as a consequence of ownership. Furthermore, there is always some pressure to use the latest products / versions. Each upgrade has a hidden management and technical cost.
Surprise The functionality and range of your products is unpredictable (to customers), which may make it more difficult for the customer to select an optimal configuration.
Poor quality When you get something wrong, the customers are the ones that incur the cost. (Of course, the customer also gets things wrong sometimes.)

how you might address customer concerns

 
Business Case Shift attention from the costs of ownership to the benefits.

Concentrate on constructing the business case for ownership.

It may be worth defining several levels of ownership, such that the benefits outweigh the costs at each level.

A well-managed organization acquires new technology (including your products and services) based on a sound business case and implementation plan. The business case would estimate the full cost of ownership, and would justify this on the basis of the expected benefits of ownership. The implementation plan would enable operational management to keep the costs of ownership within the expected limits, and enable the expected benefits to be achieved at minimum risk. Changes in the solution architecture are possible, but must be coordinated with changes in the business case and implementation plan.

Recent initiatives in the sales area, perhaps including such popular techniques as Solution Selling, should improve your ability to maintain this focus. These initiatives need to be supported by improvements in the information available to our sales force, including product availability and cost histories. 

In a decentralized or federated organization, the situation may be more complicated. The distribution of cost may not match the distribution of benefit. For example, the costs may be incurred by a central support group, while the benefits are spread across the organization

Implementation Management Make the costs of ownership more predictable/manageable.

Provide your customers with an Implementation Roadmap, and introduce some costing parameters.

The effective implementation of your solutions is a critical success factor. The Implementation Roadmap is a good structure for radical technology implementation. This may be used by account managers to plan the account and/or it may be used to provide consultancy services.

At the same time, you should develop a cost model, showing how the variable costs of implementation can be predicted and controlled. This cost model should have the additional benefit of making it easier for customers to properly separate the costs that may be legitimately attributed to ownership of your products from the costs that would have been incurred anyway. If possible, this cost model should be integrated with the Implementation Roadmap.

Customer Quality Encourage customers to improve the way they manage the deployment and use of your products.

Recommend an appropriate quality process to them as a method for systematically improving the ROI received from your products. 

You will almost certainly benefit from general improvements in the customers' management processes. If you employ your own consultants, you may want to ensure that they are equipped to provide quality management and business excellence support to your customers. Otherwise, you should look for associations with specialist consulting firms.
Your Quality Improve quality of your product and delivery

Find ways of protecting the customer from the financial consequences of your poor quality.

The better your quality, the better the value-for-money you can offer your customers, the higher the customer satisfaction, and the better the future prospects for your business. You should find ways of estimating customersí Cost of Ownership, regard these estimates as important quality measures of your business, set targets for improving the value-for-money from your products, and manage yourselves to achieve these targets.

If you have to absorb the full cost of poor quality yourselves, rather than passing the costs onto the customer, this will increase your incentive to improving quality.

Product Architecture Explain the differences between your products and apparently equivalent products from your competitors. You should communicate a clear information technology architecture to your customers and prospects, enabling them to understand the differences between your products and other tools. 

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First version May 1995
Last updated June 9th, 1999. 
Copyright © 1995, 1999. 2000  Richard Veryard
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