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The SCDigest TCO Calculator 2010 walks users through a number of normal cost areas for acquiring supply chain software, with one column tailored for On-Demand solutions and the other for traditional implementations. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

The rise of On-Demand, Software as a Service (Saas) or whatever term you want to use is a powerful megatrend that will greatly impact both users and providers of supply chain software.

As noted in the recently release Supply Chain Digest Letter on On-Demand Software, “On-Demand software will come to dominate the market over the next few years, and that will change how virtually every aspect about how companies buy, use, and think about this software.”

In general, On-Demand software offers the benefits of much lower upfront investment versus traditionally deployed software, for which an upfront license is usually paid. With the On-Demand approach, a subscription/transaction payment model is generally used, with modest “set up costs” if anything.

But while the On-Demand model usually has lower upfront costs, is it really the lowest cost approach over time? Yes, say On-Demand proponents, pointing to what they say are lower software deployment costs, the outsourcing of the day to day management of the hardware and software, automatic upgrades and other aspects of the On-Demand approach.

Not so fast, some traditional vendors say, with On-Demand you may be paying forever for something you could have bought upfront. Though most traditional vendors now offer some form of On-Demand solutions, they generally recommend a more balanced approach and analysis to find the right program for each customer.

The key, SCDigest believes, is to accurately calculate a Total Cost of Ownership (TCO) between various solution providers and solution options. That could be between a traditional and On-Demand solution offering, or between different On-Demand or traditional providers.

To that end, SCDigest has created a TCO calculator that companies can use to compare the total cost of ownership over a multi-year period, and create a Net Present Value (NPV) of those costs.  The calculator, based in Microsoft Excel, is available free to SCDigest subscribers. It, along with the SCDigest Letter on On-Demand Software and other information, is available on our On-Demand Software Resources page.

“It’s hard work to do an excellent TCO analysis, but essential to really understanding the total costs,” SCDigest editor Dan Gilmore commented for this story. “The assumptions a company makes are key. You have to be very clear about what assumptions you are making relative to various cost estimates, and make sure those assumptions can be well validated.”

It is especially important to do this kind of TCO work when evaluating On-Demand versus traditional vendors because there are so many variables.

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“You can’t just make a blanket statement that one or the other approach is the less expensive,” Gilmore says. “It depends on how much you are going to pay for the upfront license, what the maintenance costs will be, what the subscription pricing model is for On-Demand, how many people are really needed to support an application, and many other factors.”

The SCDigest TCO Calculator 2010 walks users through a number of normal cost areas for acquiring supply chain software, with one column tailored for On-Demand solutions and the other for traditional implementations. Users can lump sum numbers or break the amount in a category to more granular components if they choose.

The tool automatically calculates the totals from various categories over five years, and the user can use other time periods for the TCO if they want.

At the end, the user enters a “discount rate” to calculate the NPV of those costs over the time horizon. That number should be obtained from a company’s finance department.

After calculating the NPV of the Total Cost of Ownership, users are able to not only understand the cost impacts of different solutions, but then compare the NPV of the costs against an NPV of the expected benefits to calculate different ROIs for each alternative.

What are your thoughts on calculating total cost of ownership for different supply chain software offerings? We would also appreciate any feedback you have so we can improve the TCO calculator for 2011.

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