BlogClient Resources
Total Cost of Ownership for Software Projects

Total Cost of Ownership for Software Projects

Nate Olson
minute read

If you’re a product leader that is considering building or buying custom software solutions for your organization, you need to consider the total cost of ownership before moving forward. This article will help you be aware of the often overlooked costs of ownership for software, including cultural and employee role changes, re-training employees, lost productivity for a short period, and more that will be required to fully recognize the value of your software assets. 

Want to invest in tech? Consider total cost of ownership

Many of the potential clients that approach our digital product agency today are looking to achieve the following: they need software to evolve and keep pace with their industry, improve the way their employees engage with their work, or how their customers interact with their business altogether.

Now that half of all jobs in the US are fully remote, businesses are having to adapt to major structural changes that wholly impact the way they work. In order to innovate and survive, many organizations have turned to custom software to adapt.

If you're considering piloting a custom application within your organization, now is the time! However, before jumping into development, it's crucial to understand the total cost of ownership as it will affect the overall ROI of your project.

Let’s define total cost of ownership

Total cost of ownership can be defined as the summation of all costs associated with purchasing, owning and maintaining a digital product. This includes both direct and indirect expenses.

Oftentimes, clients only think about the build. This isn’t necessarily an oversight, as it's often the first and biggest hurdle of software development to get something built that solves real business problems. However, there are costs associated with proper software development and support that add up significantly over time and could be a blind spot if you’re not aware of them from the start. Hopefully, this article helps you navigate your next project to a successful implementation & beyond. 

The direct costs of software projects

Direct costs in software development are likely the most familiar and are directly attributable to building and implementing software solutions. You should ask your software partners not only about the cost of developing the software, but about any software licenses needed to use the systems (e.g. Salesforce, Microsoft, Amazon, Redox), 3rd party services used (Stripe, LiveChat, Google Services like maps/calendars/analytics, Heap, Papertrail, Resque/Redis), hosting and database costs. 

These licenses & 3rd party services are extremely common, but can sometimes have usage costs as well that seem small initially until your application scales and thus the cost to use them scales. You need to consider:

  • Software design & development through several iterative phases
  • Your team’s time for at minimum weekly check-ins, but often daily or bi-weekly calls, leadership calls, team huddles… all this time adds up and can be challenging to support if you have a whole other job to do 
  • Ongoing product support after launch either in a monthly support retainer or dedicated personnel
  • Hosting & database costs (scales as you have more data to support)
  • 3rd party services that power your application. Note: sometimes these costs scale based on usage

The indirect costs of software projects

Indirect costs encompass all the other costs associated with software development, including implementation, maintenance, education, your teams’ time, and training. Most commonly, we find that enterprises & SMBs are lacking a few core positions needed to support software assets long term. These roles include product management & product owner roles followed by software engineer roles you may need to hire for next. You need to consider:

  • Hiring new internal roles to support your software long term, like a product manager/owner
  • Retiring or re-skilling staff to meet the needs of the organization now with streamlined processes
  • Special task forces to battle test the new software
  • Compliance costs (e.g. HIPAA); keeping policies up to date and auditing them annually
  • Lost productivity during transitional periods.

The software is supposed to make people’s jobs easier and more efficient, right? Well yes, but not immediately. The famous economists’ productivity J curve explains that often time productivity dips before it takes off, and this is really just a learning curve/buy-in period. Depending on how big your organization is, this could represent significant lost monetary value before you realize the full value of the software.

If you’re not looking at the total cost of ownership for your software project from the start, you’ll likely run into some unexpected issues (financial or otherwise) further down the road. It’s not uncommon that organizations misunderstand how to plan for the cost of software development and are unpleasantly surprised to find that the final cost ends up being 5-10 times their original estimated budget.

As a product owner, you must factor in all the ways your organization will be investing into the success of the project over a period of several years or the software’s useful life. 

With all that said, it’s also not uncommon to see software investments that create returns that are 20-50 times the amount invested. In fact, software engagements that yield a high ROI is the reality of many of the organizations we work with. Technology that is strategically planned and executed with digital product experts can help organizations achieve their goals and then some. 

If you haven't done so yet, I strongly encourage you to become familiar with all the ways your organization is investing to plan and prepare for the journey to digital transformation.

Our team is experienced and ready to help potential clients understand their full financial investment into custom technology to achieve their desired ROI. If you have questions about your project's total cost of ownership or ROI, I'd be happy to assist however I can.

Last updated
Nov 8, 2022

Subscribe to theloop

Subscribe to our weekly newsletter of specially-curated content for the digital product community.