June 09 2016

Blog: Replatforming

What You Should Know About Total Cost of Ownership (TCO)

Anyone who has owned an automobile knows that focusing too much on the sticker price without an eye on the total cost of ownership (TCO) can be short sighted. Particularly for those of us who are budget conscious, it stands to reason that we would consider other anticipated costs such as depreciation, insurance, vehicle maintenance and repair before purchasing our next car. Sure, the latest model from Kia or Hyundai may have a low purchase price and a long-term warranty but those cost advantages are often off-set by low resale values. Conversely, most hybrid vehicles, such as the Prius, may cost you more to drive off of the lot but the savings at the pump and at the mechanic’s shop may cost you less over the period of ownership.

As with cars, investing in a software platform to support your e-commerce channel requires consideration not only of the cost to initially implement your site, but also the total cost of ownership including changes to adapt to your business needs, management overhead, hidden costs and costs associated with disruptions when you are not able to sell your products online.

Unlike purchasing a car, however, there is not as much information out there to evaluate the difference in average TCO from one e-commerce platform vendor to another. Furthermore, many of these costs are hidden in small print or tacked on after you’ve made the initial investment to implement the e-commerce system. So let’s dig in and expose both the carrying and operating costs of your e-commerce site:

Carrying Costs. These are the costs associated with the purchase or installation of your system. Whether building your site using internal employees or outsourcing to an e-commerce platform vendor, the costs of deploying resources to build your site are typically easier to define and understand than operating costs. Carrying costs may include upfront software installation fees, interest on financing, and if building your own site, investments in supporting infrastructure such as web servers and the salaries of those employees required to build the site.

And often overlooked are the indirect costs associated with the installation period. For greenfield projects where you are looking to sell a particular product-line for the first time through an e-commerce channel, time spent on a long implementation period is money lost and calculated not only by the product left sitting on a shelf in your warehouse but also by the overhead of your employees having to support a prolonged project at the cost of not addressing other important business initiatives. Look for vendors which assume part of the risk of deployment by moving some or all of the upfront deployment fees to be amortized on the back-end, once the site is actively adding to your revenues.

Operating Costs. How many software vendors have told you, “My product is ‘plug and play’ and fully functional to meet your business needs”? Whether the future of enterprise systems includes technology that is easily configurable to meet all the needs of all clients without the intervention of a software developer is unknown; I tend to shy away from saying “never” given the pace of innovation. For the foreseeable future, however, using developers to align your technology with your business needs is a necessary cost to consider. But ask your friendly neighborhood recruiter, not all developers are made the same, nor do they all cost the same. Just as you would when building your own technology solutions, it is equally important when sourcing an e-commerce platform vendor to consider the technology stack supporting the product. As the client, you can always try to lean on the SLA, but be wary of vendors pitching highly proprietary, specialized or outdated technology, as their difficulties in finding affordable software developers will inevitably lead to throughput issues and higher costs of delivery. When was the last time you paid for one year of an experienced and competent Oracle, SAP or Salesforce.com developer for less than it costs to send your child to an IVY league school for four years!

Enterprise systems have also gained a reputation for expensive and organizationally disruptive upgrades. Most IT executives cannot go to their business stakeholders with the binary choice, “Do you want to stay current with regular platform releases or would you prefer to customize the application to meet your needs?” Although there should be no forced choice, we have all faced the dilemma of upgrading an enterprise system which the business has spent 5-10 years molding to meet its particular needs. The fall-out of such a project is destined to drain your budget dry and claim someone’s job, unless you select an enterprise platform provider which has designed a system with a clear upgrade path (and eventually port to the next generation of application).

It may be difficult to look under the hood of an e-commerce platform to see the intricate wiring that makes it run, but you can certainly ask around to determine whether a given platform comes with straightforward, easily modified code or is a complete jumble of poorly engineered techno-poo. Do existing clients pay through the nose to make the simplest of changes because some too-smart for his britches architect wanted to show just how smart he was? Or can that change be accomplished through either an administrator’s interface or perhaps 30 minutes of a developer’s attention? Taking it ever further, is the user interface easy to learn and use or must your valued resources have to continually seek retraining or worse, have to pay a vendor to change the setting for you?

Hidden Costs, by definition, are the most difficult to understand when evaluating e-commerce platforms. Whether your procurement is based on a formal RFP process or you have the autonomy to streamline your decision, ensure that you are making direct inquiries of the candidate vendors on the entire universe of costs which can be incurred in using their technology. If they hesitate to answer or resemble a ‘deer in the headlights’ due the magnitude of their universe of potential costs, buyer beware. The types of hidden costs can be diverse and the impact to your business relative to the size of your company. Some of these fees have been created by the vendor to address unexpected stress on their technical design due to larger customers conducting more transactions with consumers and 3rd party interfaces. Look for vendors which place specific quotas on your usage of their system. Although little more than an annoyance to an organization that spends millions on their e-commerce channel, also watch for smaller fees for such activities as recertifying your sites to be SSL compliant. Businesses with multiple sites may discover that they are incurring unbudgeted costs to address fees which are buried deep in a vendor’s documentation.

Similar to buying your next car to replace that dying rust bucket in the driveway, ensure that you take the time to extract not only the cost to drive your new site ‘off the lot’ (implement) but also what shall be required to maintain and improve that site during its lifetime. The only important difference between the procurement of a car and an e-commerce platform is that you need not worry about the cost of not discussing the decision with your spouse!

Learn About The Next Level of Commerce

B2B, B2C, OMS ALL IN ONE SOLUTION
Request A Demo
Commerce Manager Dashboard