Assignment in total cost of ownership for IT solutions using excel

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Table of Contents for Learning Module 3

Lesson 3.2
Estimating Hardware and Software Costs

Lesson 3.1
What is Total Cost of Ownership? Why do it?

Lesson 3.3  might be the online makeup lesson
Estimating External and Internal Services Costs

Lesson 3.4  might be the online makeup lesson
Estimating Direct and Indirect Labor Costs

Lesson 3.5  might be the online makeup lesson
Estimating Miscellaneous Costs

This learning module is based loosely on Bannister Chapter 3

Let’s get started …

Lesson 3.2
Estimating Hardware and Software Costs

Lesson 3.3
Estimating External and Internal Services Costs

Lesson 3.4
Estimating Direct and Indirect Labor Costs

Lesson 3.5
Estimating Miscellaneous Costs

Lesson 3.1
What is Total Cost of Ownership? Why do it?

This learning module is based loosely on Bannister Chapter 3

Focus of Next Three Learning Modules

PROSPECTIVE PROJECT

IT SOLUTION (as defined on next slide)

(each of above covered in a separate learning modules)

Costs
(implement)
(operate)

Benefits
(operate)

CBA

Where CBA = Cost-Benefit Analysis = Financial Analysis = Investment Analysis

What is an “IT Solution”?

Any new solution to a business, government, or societal problem or opportunity that is built around information technology

Examples of IT solutions include:

New or improved IT systems or applications of any size

New or improved data stores (e.g., data warehouses/repositories)

New or improved physical products that include embedded IT

New or improved IT infrastructure

New or improved IT “services”

The PRE-project question:

“How do you estimate the true
cost of ownership of any proposed IT
solution?”

… Even when you don’t know which technologies or products you will use?

The unfortunate post-project question:

“Why didn’t you tell me about all these
other costs?”

Our strategic questions

Discussion

Why do IT professionals have a poor reputation with respect to estimating the costs of IT solutions?

So what will an IT solution REALLY cost?

Because even experienced IT professionals forget the TOTAL COST OF OWERSHIP over a lifetime

The Overarching Question

What are the estimated Total COSTS of Ownership (TCO) of the prospective IT solution, inclusive of software, hardware, services, people, etc.?

Not about budgeting … it’s about estimating
May be critical to requesting and getting funding
Usually critical to financial responsibility accounting
(meaning, “who pays for what”)

Introducing … Total Costs of Ownership

Total Cost of Ownership (TCO)
The estimated lifetime costs an organization can expect to incur for an information technology solution

Definition

What costs are included in a TCO?

TOTAL COST OF OWNERSHIP of an IT solution

Cost of acquiring any needed technology (software and hardware)

Cost of installing and configuring any new technology

Cost of developing or enhancing software

Cost of implementing the software (putting it into operation)

and after you’ve implemented the package

Cost of ongoing support to users of the software

Cost of ongoing maintenance of the software
(such as bug fixes, improving security, future enhancement)

WHAT DOES "PASS" STAND FOR?

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Visibility of Costs

Many costs are visible, if you don’t forget them …
… but some costs are only semi-visible

Installation

Configuration and personalization

Software development and testing

Training (which is on-going)

Lifetime maintenance

Lifetime support

… and some costs are virtually invisible

Time commitments of IT and its customers

Learning curves (temporary loss in productivity, or early mistakes)

Ineffective use of solutions (incomplete use, avoidance, workarounds)

Inappropriate use of solutions

Duplication and redundancy

Poor ergonomics (for people and human computer interaction)

HOW WELL DO YOU SEE THE CASH FLOWS

Basic cost concepts

Some costs are one-time; other are recurring
Some costs are fixed; others are variable based on some metric
Some costs are incurred internal; other are external
Some costs are directly attributable to your solution’
others are indirect with respect to your solution
Some costs can be “sunk”
Some costs require LOADING (also called “add-in” or “knockback”) – example include:

Benefits added to salaries

Vendor-provided maintenance added to software or hardware

Expenses added to consulting services

Notes

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So, what types of costs need to be estimated?

Infrastructure

Computers

Networks

Software

Application

Systems

Development tools

Services

Externally provided … from external suppliers

Internally provided by IT … possibly recharged back to customer

Labor Costs

New hires

Temporary or permanent time commitments of existing employees

Miscellaneous Costs

What factors influence cost estimates?

One-time versus recurring
Fixed versus variable
Internal versus external
Direct versus indirect
Sunk
Loading rates that must be added to some costs

Benefits added to salaries

Supplier-provided maintenance added to software or hardware

Expenses added to consulting services

Notes

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Why do a TCO Analysis?

Provides a realistic look at ALL of the estimated costs to be incurred for the IT solution, including those to be incurred after the IT solution has been implemented and put into service

Proposed? How can you estimate costs if you don’t yet know the specific solution

Non-IT people often forget that costs continue to be expended long after an IT project is completed

Costs must ultimately be offset by benefits

GOAL OF TCO
Minimize, if not eliminate surprises during and after the project

Notes

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TCO is about ESTIMATING

Information Sources for Estimating Costs

Internal expertise and history
Industry analysts

Examples Gartner, Forrester Research, Auerbach, etc.

Require annual fees and, sometimes, per-use charges

Benchmarking with other companies willing to share
Trade press

Technology periodicals

Industry periodicals … for your company’s industry

Functional periodicals … for your assigned problem domain

Professional associations

Technology

Industry

Functional

Web … try to filter “hype”
Sales representatives

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Coming Assignments

Over the next 3 learning modules, you will develop a project estimating tool that you can use during your career to improve financial planning and investment analysis for proposed IT projects.

1, TCO improve on a provided solution

2. Build from scratch based on TCO solution and style

3. Build from scratch

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4. Funding model

5. Project budget

Where are we?

Lesson 3.2
Estimating Hardware and Software Costs

Lesson 3.3
Estimating External and Internal Services Costs

Lesson 3.4
Estimating Direct and Indirect Labor Costs

Lesson 3.5
Estimating Miscellaneous Costs

Lesson 3.1
What is Total Cost of Ownership? Why do it?

This learning module is based loosely on Bannister Chapter 3

So, what types of costs need to be estimated?

Infrastructure

Computers and peripherals

Networks

Embedded devices

Software

Application

Systems

Development tools

Services

Externally provided … from external suppliers

Internally provided by IT … possibly recharged back to customer

Labor Costs

New hires

Temporary or permanent time commitments of existing employees

Miscellaneous Costs

COST CATEGORY #1

Infrastructure, including computing hardware (including operating systems), networks (including network operating systems), and embedded devices

Candidate Infrastructure Costs to Include in TCO

Servers … shared by multiple clients and users

Production

Non-Production
(smaller-scale versions for development, testing, troubleshooting, and maintenance)

Clients … generally used one user at a time

Desktop computers + laptops + mobile devices

Peripherals
Network ... connecting clients and servers

Routers, access points, firewalls, load balancers, storage area network appliances, etc.

Hardware for connectivity to intranet, Internet, privte network, etc.

Embedded computers inside devices, appliances, and machines

Server Costs to be Estimated

Web servers … for human computer interfaces, if web-based
(obviously not needed if user interface is installed on the clients)
Application servers … runs the business logic of your PASS
(also makes “calls” to any other servers needed by your PASS)
Database servers … executes all SQL commands for your PASS
Messaging servers … executes any messaging services for PASS
(such as email, text/messaging)
Print servers… executes any shared printing services for PASS
(if applicable; includes fax)
File servers … executes any file services for your PASS
(if applicable – but some packages provide file sharing opportunities)
Other “shared” services made available to PASS

CAN BE MORE … KEY HERE IS TO DO YOUR HOMEWORK. FIND OUT WHAT KIND OF SERVERS ARE TYPICALLY REQUIRED FOR THE TYPE OF PACKAGE YOU ARE ESTIMATING, REMEMBERING THAT YOU SHOULD PROBABLY NOT ASSUME YOU KNOW WHICH SPECIFIC SOFTWARE PACKAGE YOU ARE GOING TO PROCURE. THEY ARE USUALLY SIMILAR.

Considerations That Impact Server Costs

Web, Application, Database,

Of course, these servers talk to each other, and to client devices

Server Life Cycle Landscape Requirements

A life cycle landscape is typically needed to support multiple simultaneous instances of the IT solution in various stages of development or production.

The NON-PRODUCTION servers are sometimes forgotten in a TCO.

Instance Name	Abbreviation	Notes
PRODUCTION	PROD	Runs the currently operational version of the solution.
PRODUCTION Disaster Recovery	DR or PROD 2	Not always affordable. Can also be used for load balancing or to ensure availability. Use same products and sizing as used in PROD.
NON-PRODUCTION SANDBOX/SEED	SBX or SEED	For “playing with” new technology or developing “proofs of concept”. Very small; can frequently be built from trickle-down technology.
NON-PRODUCTION DEVELOPMENT	DEV	For system development or configuration, and unit testing. Not nearly as big as a PROD because just for developers and initial testers. But should use same products as PROD.
NON-PRODUCTION TESTING/QUALITY ASSURANCE	TEST or QA	For larger scale system and integration testing. Larger than DEV. Usually smaller than PROD. Should use same products as PROD.
NON-PRODUCTION” TRAINING	TRAIN or TRN	For development team and end user training. Not nearly as big as PROD because fewer simultaneous users. Should use same products as PROD

A MAJOR HIDDEN/FORGOTTEN HARDWARE COST

Possible Life Cycle Landscape Combinations

PROD + TEST + DEV + TRAIN + SEED
PROD + (DEV / TEST) + TRAIN + SEED
PROD + DEV + (TEST / TRAIN) + SEED
PROD + (DEV / TEST / TRAIN) + SEED

Notes:

All servers can be real/physical –or- virtual (trend is virtual)

You almost always need ALL instances in some combination (see next slide)

PROD can be duplicated to balance workload or provide failover

Some IT solutions also recommend a small PRE-PROD for troubleshooting

DEV and TEST could be duplicated if you are working on multiple future versions at the same time

Web, Application, Database,

Of course, these servers talk to each other, and to client devices

Sample Life Cycle Landscape (for a large ERP)

Client Costs to be Estimated

Fat versus thin clients

Fat = user interface, and possibly the business logic, executes on the client as an app

Thin = user interface code executes inside a web browser, meaning it executes on a server (usually web) = requires less robust client computer

Mobile Clients

User interface, and executes in the device’s web browser

User interface, and possibly some or all business logic executes as an app on the device

Considerations That Impact Client Costs

Web, Application, Database,

Of course, these servers talk to each other, and to client devices

Peripheral Costs to be Estimated

Printers
Scanners
Extra Monitors
Others

Embedded Devices to be estimated

Robots
ATM machines
Smart devices and appliances
Embedded subsystems in major products

TODAY’S HOT TOPIC
The “Internet of Things”

Estimating Costs for Infrastructure

Benefits
Maintenance
Expenses

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Notes for last slide

Each hardware need must be estimated as a line item

Suggest separating production versus non-production servers

Suggest separating project team clients and end user clients

Recurring add-in cost is calculated using a loading rate that reflects typical maintenance contract with supplier

Supplier maintenance agreements includes vendor technical support, troubleshooting, repair, and parts replacement within guaranteed timelines specified in a Service Level Agreement (SLA)

Optional, but you usually need it

Usually some percentage of the purchase cost
(typically, 10-15% per year)

But frequently does not start until after service built into hardware price expires

These are estimates, meaning educated guesses (see next slide)

Recommend using “worst case” – which is undiscounted prices from most expensive candidate supplier

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Sources for Estimating Infrastructure Costs

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Discussion Point

So what does the infrastructure portion of a TCO worksheet look like?

Discussion Point
What software costs should be estimated for a proposed IT solution?

Candidate Software Costs to Include in TCO

Application software

Primary application(s) that needs to be purchased or acquired

Any bolt-on applications that need to be purchased or acquired

System software or utilities that need to be acquired
(does not usually include operating systems)
Software development tools needed for application design, programming, testing, and management
Software updates for any of the above that are already owned, but must be upgraded to a new version
(if not free)
What about software to be built?

NEW or UPGRADED utility software

Database management software (e.g., Oracle, DB2, SQL Server, etc.)

Identity management systems

Email systems

Web content development and management systems

Backup and recovery systems

Virtualization systems

New middleware

message brokers

business process orchestrators

web services

Development Tools that might be needed

Application development environments
for software development
(e.g., Visual Basic, C++, Java, Python, COBOL)
Software testing tools (e.g., HP Mercury)
Version and configuration management software
(e.g., PVCS, Solution Manager)
System modeling or diagramming software
(e.g., Visual Paradigm, Rational ROSE, ERwin)
Report writing or business intelligence software
(e.g., Cognos, Business Objects, Brio, Crystal Reports)

Software to be Built

Cost of project management
Cost of systems analysis and design
(also called software engineering)
Cost of application development/programming
Cost of software testing

For your information, these are not currently built into the 2.20 template. Left as an exercise for you.

Software Considerations That Impact Estimating

“Technology” standards in your company
(e.g., UNIX vs. Windows Server vs Linux;
or Oracle vs. DB2 vs. SQL Server)
Licensing models for this type software

Per site

Per server  most common

Per employee (regardless of whether they use it)

Per user (takes into consideration if they use it)

many others

Software maintenance model for this type of software
Internal IT chargebacks for the software (if applicable)

Estimating Costs for Software

Benefits
Maintenance
Expenses

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Notes for last slide

Each software need must be estimated
Estimated Quantity is based on licensing model

Most common value = 1 but it can dramatically vary

If industry uses multiple licensing models, pick worst case for estimating

For open source software, price = 0 or some nominal administrative fee

Loading Rate (aka Add-in Rate) includes vendor technical support
and, usually, software updates and upgrades

Usually some percentage of the licensing costs (typically, 15-30% per year)

These are estimates, meaning educated guesses

Recommend worst case, meaning most expensive product and undiscounted price

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Sources for Estimating Infrastructure Costs

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Discussion Point

So what does the software portion of a TCO worksheet look like?

ALL SUBSEQUENT SLIDES IN THIS POWERPOINT FILE
SUBJECT TO CHANGE FOR IMPROVEMENT

Where are we?

Lesson 3.2
Estimating Hardware and Software Costs

Lesson 3.3
Estimating External and Internal Services Costs

Lesson 3.4
Estimating Direct and Indirect Labor Costs

Lesson 3.5
Estimating Miscellaneous Costs

Lesson 3.1
What is Total Cost of Ownership? Why do it?

This learning module is based loosely on Bannister Chapter 3

What are the costs of an IT Solution?

Infrastructure

Computers

Networks

Software
Services

Externally provided

Internally provided … recharged back to customer

Indirect Costs

People … internal; as in their time commitment

People … new hires

Miscellaneous Costs

WE ARE HERE

COST CATEGORY #3

All services required to implement and/or operate the packaged application software solution

Discussion Point
What services costs should be estimated for a proposed IT solution?

Candidate Services Costs to Include in TCO

Externally provided services

Consulting

Technical “backfill”

Outsourcing

Internally provided services (through IT)

May be charged back to customer

May be absorbed in the IT budget

Discussion Point
What are external services and providers?

External Services

Externally contracted services

Implementation consultants to help implement the IT solution

Temporary technical expertise (e.g., contract programmers)

Longer term business or technical services (e.g., outsourcers, software application services providers <ASP>)

Most commonly expense is for people, but may also hardware and software charges
Common synonyms and acronyms include:

External Services Provider (ESP) … before implementation

Implementation partner … through implementation

Consultant … through implementation

Contractor (or subcontractor) ... through implementation

Application Services Provider (ASP) … after implementation; runs application FOR you

Representative External Services for PASS

Software selection and contract negotiations
Infrastructure planning and selection
Legacy application backfill
Software installation and implementation team training
Software configuration
Business process redesign
Data conversion design and programming
Interface design and programming
Security design and testing
Software testing
Training
Post implementation troubleshooting
Post implementation operations (run the solution FOR you)
Post implementation support (run help desk for you)

External Service Cost Estimating Considerations

What types of services do we need for this type software?
How do you express “quantity needed”?
How do you express unit cost?

Fixed price engagement? BEWARE!!! “Danger, Will Robinson!”

Time and expenses? RECOMMENDED

Time = dollars per hour

Expenses … recommend they be estimates at % of total consulting costs

Materials … any charges for any temporary technology provided by ESP

ISSUE: Should you build a buffer in either hours or rates?

Estimating Costs for External Services

One-time versus recurring costs

Most engagements are one-time, meaning they have a start date and end date

But the actual cash flows recur between the start date and end date

Post implementation services are always recurring

Fixed versus variable costs

Most of cost is variable based on estimated billable hours × billing rate

May includes some fixed costs for methodologies or software tools the vendor brings with them

External versus internal costs

By definition, all external services costs are external, meaning paid to the ESP or ASP

Benefits
Maintenance
Expenses

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Estimating Costs for External Services (continued)

Sunk costs versus reallocations versus incremental costs

External services costs that have already been spent should be recorded as SUNK costs

Most external services costs are incremental

Direct versus indirect costs

All external services costs are usually considered direct, meaning that services are directly attributed to the IT solution being estimated

Loaded versus unloaded costs

External services costs must be loaded with estimates of expenses (such as travel, lodging, meals, etc.)

Recommend loading these expenses as a percentage of estimated overall costs

Based on history, benchmarks, or vendor supplied data

Looking ahead, an increasingly common practice is contracting the service provider at a load rate, meaning built into the hourly rate

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Reminder: Where do you get the estimating data?

Discussion Point

So what does the external services portion of a TCO worksheet look like?

Discussion Point
What are internal services and providers?

Internal Services Costs

Internally provided services

Almost always associated with the Information Technology unit

Basic concepts: nothing is free; and many IT units recharge some of their services back to the customer

How does IT recharge internal services?

IT organization gets funded (= budgeted) as a mix of:

Central funding (from the CFO level)

Costs recovered by recovering some costs from IT’s customers

What costs should be absorbed by IT?

What costs should be recharged to customers? Called recharges or chargebacks

REGARDLESS, the costs are real; therefore, they should be included in the TCO even if not included in the project budget

Candidate internal services that can be recharged

Project management
Internal consulting (e.g., technology choice, security)
System development (including software design and programming)
Software testing (beyond unit testing)
System administration

Web administration services

Database administration services

Application services

Email services

Usage-driven costs

Desktop and peripherals support

Data storage

Network usage

Application hosting

Training

Internal Service Estimating Considerations

What types of internal services are we allowed to recharge?

Most organizations’ accounting departments determine what can be recharged and at what rates or costs

Rule of thumb is, “You can only recover tangible costs; but you cannot make a profit”

What rates or prices will be used to calculate cost

Service to be recharged must get an approved rate from cost accountants

Rate must be accompanied by a well documented Service Level Agreement (SLA)

Therefore, if you have no existing, approved recharges, you generally cannot include them in your TCO

Estimating Costs for Internal Services

One-time versus recurring costs

Some internal service costs are one-time

Some internal service costs are recurring

Fixed versus variable costs

Most internal service costs are variable, based on customer consumption
(e.g., storage space used, billable hours, headcounts, technology counts,
bandwidth used, etc.)

External versus internal costs

All internal services costs are, by definition, internal; regardless of whether or not they are recharged

NOTE: If recharged, the funds are internally transferred from the customer’s budget customer to IT ‘budget’ once the service is provided

So, should this section be used only for recharged costs?
As a general rule, YES!

Benefits
Maintenance
Expenses

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Estimating Costs for Internal Services (continued)

Sunk costs versus reallocations versus incremental costs

Not really applicable to internal services

But once the Service Level Agreement is signed, the cost is incremental to the department who pays for the service

Direct versus indirect costs

Internal services costs are considered direct, if recharged

Internal services costs are considered indirect, if not recharged

Which brings us back to whether to document here if NOT recharged?

Loaded versus unloaded costs

Internal services costs must usually be based on prices as approved by accounting – accounting will determine whether or not loading is apprpriate and approved

Benefits
Maintenance
Expenses

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Reminder: Where do you get the estimating data?

Sample Internal Cost > Training …

Training for package implementation team
(usually also includes production and support teams)

Functional – understand the solution and how to use it

Technical – understand the technology and how to implement it

Training for the larger customer/user community

Functional

Understand how to use the application software

Understand how to execute the new business processes
(e.g., organization, policies, practices, work flow, exceptions, etc.)

Technical

Understand how to maintain and sustain the technical solution

On-going training for new employees, transferred employees, new versions of software, etc.

Training Costs to Include in TCO

Course acquisition and/or development

Any training hardware and software needed

Any external services and/or internal labor
(be careful to not double count in other sections)

Any supplies and expenses

Course logistics

Space … may have to be rented

Equipment … may have to be rented

Registration and enrollment management

Duplication of course materials

Course delivery

Technical support for training servers and software

External services and/or internal labor
(be careful not to double count elsewhere)

Supplies and expenses
(such as meals, snacks, coffee, etc.)

Discussion Point

So what does the internal services portion of a TCO worksheet look like?

LM 3: Total Costs of Ownership

Today’s Reference

Lesson B Estimating Infrastructure Costs

Lesson A Total Cost of Ownership in Context

Lesson D Estimating Services Costs

Lesson E Estimating Labor & Miscellaneous Costs

Lesson C Estimating Software Costs

The highlighted lesson is based on Chapter 3

What are the costs of an IT Solution?

Infrastructure

Computers

Networks

Software
Services

Externally provided

Internally provided … possibly recharged back to customer

Labor Costs

DIRECT  People … new hires, if needed

INDIRECT … time commitments of existing employees

Miscellaneous Costs

WE ARE HERE

Discussion Points

All IT solutions incur labor costs. But are all labor costs equal?

Direct labor costs … must get funding
Indirect labor costs … already funded

DIRECT LABOR COSTS

Direct out-of-pocket costs

New employee hires needed for the IT solution’s implementation and/or operation
Cost of planned terminations

Taxonomy for New Hires

Could be

Technical = IT professionals, engineers, or technicians

Functional = everyone else (a.k.a. customers or users)

Managerial … but usually classified as technical or functional (as above)

Could be

Permanent

Need is generated by the IT solution (either technical or functional)

May or may not be assigned to the IT solution after implementation

Temporary - often called “BACKFILL”

Need to play role(s) in implementing the IT solution (technical)

Need to play role(s) in sustaining the legacy system (technical or functional)

Cost of New Hires … relatively easy … [improved from last class]

Years to include in TCO

A permanent new hire is a recurring commitment; therefore, the cost recurs in every year in the TCO after the hire is made

A temporary new hire (backfill) has a start and end year

What to include in the cost

One-time costs (usually based on standards)

Hiring expenses (e.g., advertising, hiring tests, background checks, etc.)

Recurring costs

Salary range as approved by HR (suggest estimating on high end)

Benefits – usually loaded as a standard percentage provided by HR

Expenses – if standardized by management or HR

Benefits are usually

Cost of Planned Terminations

Also called downsizing, rightsizing, or reduction in force (RIF)

Years to include in TCO

Strategies include layoffs, early retirement packages, incentives, etc.)

Each estimated expense should be recorded in the years they will occur

What to include in the cost

Severance/separation pay (usually occur in just one year of the TCO)

Bridged benefits (can occur in one or more years after the terminations)

Most common bridged benefit is health insurance
(example: CORBA, sometimes required under U.S. law)

Companies frequently provide health insurance under their existing

3rd party placement services (usually occur in just one year of the TCO)

Benefits are usually

Side-bar Discussion

What if we need to take an employee away from their normal job responsibilities temporarily to work on our project?

These are those direct labor costs as caused by indirect labor

Options to temporarily cover normal responsibilities

Do nothing… remaining employees must pick up the slack
Hire temporary employees to fill in

Called BACKFILL … everyone must understand it is a temporary solution

If you are going to propose backfilling responsibilities, then you must include in TCO; otherwise, you have NOT reported a REAL cost

Record backfill as separate line items … isn’t that double-counting? No!

As a general rule, BACKFILL positions cost significantly LESS than the people they replace

Hire permanent NEW employees … rarely approved

INDIRECT LABOR COSTS

Labor costs of existing employees commitment of time (part or full) that are NOT directly budgeted to the IT solution or project.

Examples include customer subject matter expertise, technical expertise, and management oversight.

Indirect Labor

INDIRECT LABOR includes time commitments that are NOT recharged to the customer

Basic concepts: nothing is free; everything costs something!

Two sources of indirect labor are:

Technical = IT and engineers

Functional = everyone else = customers = subject matter experts (SMEs)

Inclusion of INDIRECT LABOR in a TCO is controversial !!!

How is the IT organization funded (= budgeted)?

What costs should be simply “absorbed” by IT? Should they be accounted for?

Is customer contributed time really a cost? Should it be accounted for?

It all comes down to COST ACCOUNTING, an established practice in general accounting and finance

REGARDLESS, the costs are real; therefore, they should be included in the TCO even if not included in the project budget

Examples of Indirect Labor

Technical expertise time commitments

Systems analysts and architects

Other Technical specialists

Developers

Support specialists

Functional expertise time commitments

Business process owner (delegated decision authority)

Subject matter experts

Business analysts

Management time commitments

Executive Sponsor (champion)

Project Manager

Change management roles

Clerical and service staff time commitments
(most companies choose to ignore these costs unless they become DIRECT costs)

Why Estimate Indirect Labor?

Will indirect labor become part of the project budget? No!

So why include in the TCO?

To explicitly recognize and account for the cost of time commitments

To identify possible need to cover employees’ normal responsibilities during the project to implement the IT solution … this is called
BACKFILL, which was covered under direct labor costs under the heading of temporary hires

Estimating Indirect Labor Costs

Line items in TCO should be “roles”, and “names”
What does an employee really cost (recurring)?

Annualized pay

For salaried employees, simply use the annual salary

For hourly employees, convert the hourly rate into a salary equivalent

Salary Equivalent = Hourly Rate x Total Hours Worked per Week X 52 weeks

Administrative Assistant = $15.00/hour x 40 hours/week x 52 weeks/year = $31,200

Benefits … use standard loading factors from HR

Note that standard loading factors might be different for salaried, hourly, and temporary employees in your TCO

Expenses … if a standard rate exists for it

Discussion
What does an existing employee really cost, with respect to their time commitments to your IT solution?

Reminder: This cost is already in somebody’s budget; therefore, there is no need to request new funding – We are simply accounting for their time commitment

What does an employee really cost?

Discover expected gross pay for their “role”
(for hourly employees, calculate as previously demonstrated)

Senior Systems Analyst $75,000/year

Load in the cost of employer-provided benefits

If standard loading factor for salaried employees is 30%

Senior Systems Analyst benefits = $75,000 x .30 = $22,500/year

Add in standardized expenses (if available)

If expected expense for an IT professional is $5,000/year

Senior Systems Analyst expenses = $5,000/year

TOTAL COST OF A SENIOR SYSTEMS ANALYST = $102,500/year

Issues we need to resolve to calculate indirect cost

An employee may not work full-time on a project? In other words, they work on other projects and responsibilities
An employee might not work on the project for a full-year? Not all projects require all team members to work one full year … and some may work more than one full year

How to calculate cost of employee time to a project

Let’s continue to use our senior systems analyst example

How do we express time commitment?

For example, if an employee will work an average of 10 hours per month
on our project, then
Time Commitment = 10 ÷ 40 = 0.25 FTE per month

How do we account for annualized project duration?

For example, if the person will work on the project for only 6 months
of one year
Commitment Duration = 6 ÷ 12 = 0.50 FTE per year

So what is the total cost of the time commitment?

Cost = Loaded Salary x Time Commitment x Commitment Duration

Cost of Senior Systems Analyst = $102,500 x 0.25 x 0.50 = $12,813

Side-bar Discussion
What if an employee will have a different commitment to the application AFTER it goes into operation?

USE A SEPARATE LINE ITEM

Post Implementation Time Commitments

Use a separate line item for the post-implementation (=operations) commitments
What if you choose to OUTSOURCE post-implementation time commitments?

The outsourcing costs get recorded in the EXTERNAL SERVICES section of the TCO

But don’t forget to include an appropriate FTE commitment in INTERNAL LABOR to manage the outsourcer and service level agreement

Discussion Point

So what does the indirect labor services portion of a TCO worksheet look like?

Discussion Topic
Are there any other costs to include in a TCO?

Maybe! Especially if new funding is needed.

What are the costs of an IT Solution?

Infrastructure

Computers

Networks

Software
Services

Externally provided

Internally provided … possibly recharged back to customer

Indirect Labor Costs

People … internal; as in their time commitment

People … new hires

Miscellaneous Costs

WE ARE HERE

Considerations for Miscellaneous Costs

Only include these costs if they are to be direct costs associated with the project or IT solution
Most common for very large projects that require unique infrastructure
(e.g., ERP, BI, CRM, PLCM)
Will any incremental costs be sustained after go-live?

Examples of miscellaneous costs

Logistics

Space

Furnishings

Office equipment

Services

Food/beverage

Telecommunications

Utilities

Moving

Custodial

Repairs

Equipment maintenance

Supplies and expenses (S&E)

Consumables

Travel

REMINDER: Only include miscellaneous costs that will be directly budgeted to the project or solution

Contingency Funds

Purpose is to build buffer to mitigate the reality that costs estimates are just that – ESTIMATES

Corporate policy may prohibit or limit inclusion of contingency estimate in TCO

If allowed, corporate policy may restrict use or access

Some estimators “hide” contingency inside other cost estimates
(not recommended – it is LAZY – it eventually reduces your credibility)

Common uses for contingency

Offset unforeseen costs that were not captured in TCO

Incentive for rewards (if contingency funds not used)