Purchase price isn't everything.  

Total Cost of Ownership, or TCO, is a common method used to evaluate the expected lifetime or ongoing costs of several alternative approaches. Pioneered by Gartner more than 20 years ago, the Gartner TCO model takes into account four broad categories of cost: capital, IT operations, administrative, and user operation.

A recent Gartner press release provides the following example. "For a large company, the cost of purchasing a desktop PC may be only $1,200, but, kept for four years, the total cost of ownership (TCO) could be as much as $5,867 per year..."  Note how the operational costs can accumulate over years and overwhelm acquisition costs.  Calculating TCO can help you better understand and compare the costs beyond the initial purchase.

For this discussion, I am going to simplify the Gartner model and focus on acquisition costs, implementation, and operation.

Acquisition
Acquisition costs include everything it takes to purchase the solution components. This will include buying the software license, infrastructure hardware (e.g., servers, storage, load balancers, routers, etc.), and infrastructure software (e.g., application servers, database servers, backup and recovery tools). These items are often where all the focus goes during the decision and purchasing process, and they are important, but they may represent less than 30% of the TCO.

Implementation
Implementation costs cover the wide range of expertise necessary to assemble the components into an operational solution. This starts with the solution design process in collaboration with all of the players that will be involved. Once the plan is in place, there may be internal and external resources required for the software development necessary to configure or customize the software to the field devices.  It will also include the IT experts necessary to set up the equipment in the data center, configure it, and then test.  There may be subtle, but significant, differences in the implementation and assembly costs for each solution so pay attention to the details.

There is another set of costs that is similar across any of the solutions being evaluated.  These include the end-to-end testing (and validation for some regulated industries), marketing and promotional costs, and internal adoption programs. You should account for these in your budget, but they only need to be included in the TCO comparison if you believe there is a significant difference between the options being evaluated.

Operation
Operating the solution over time can represent a cost that is many times the initial investment.  Operating costs may include any of the following:

• Hardware and software maintenance fees
• Infrastructure operations costs
• Floor space costs
• Electricity and cooling.
• Internet connection and bandwidth
• Server hardware and software costs
• IT personnel costs (you may need portions of networking, server, security, and database resources)
• Upgrade costs (for hardware and software)
• Scaling costs (more infrastructure needed as the number of assets or users expands)
• Backup and Recovery Process costs
• Costs associated with failure or outage
• Technology training costs of IT support staff
• Training for application users

One of the major drivers for Axeda to offer its platform and applications under the Software as a Service (SaaS) model was to help customers reduce their TCO.  Use of on-demand delivery removes the need for customers to purchase server infrastructure, train IT staff to manage the solution, and handle the process of version upgrades. An added benefit is that the hosted environment has proven to have higher uptime than our customers were experiencing in their own data centers.

Don't forget about the cost of feature requests or enhancements over time. Give some consideration to how much effort will be required to develop customizations and then to deploy them (both at the Server and Agent levels).  This can be a huge impact when considering internal development as one of the options. Is it core to your business to take on the cost of development or can you take advantage of the shared costs a purchased solution provides?

Once you have your estimates for each category, you should be able to assemble a TCO over the first 3 to 5 years. The totals are important, but also use this exercise to help understand when costs will occur. This information and insight will be extremely valuable when you are finalizing your business justification for the project and presenting the program to management.

Read the related articles for Randy's 10-Step Series:
10 Steps to a Successful Remote Service Evaluation
Step 1. Successful Remote Service Evaluations - Have a Vision of What Success Looks Like
Step 2. Successful Remote Service Evaluations - Work with Cross Functional Teams
Step 3. Successful Remote Service Evaluations - Answer What's in it For Your Customers! 
Step 4. Successful Remote Service Evaluations - Agree on a Scoring Matrix and an Evaluation Process
Step 5. Successful Remote Service Evaluations - Security Matters
Step 6. Successful Remote Service Evaluations - Scalability is More Than Just Multiplication
Step 7. Successful Remote Service Evaluations - Usability is the Key to User Acceptance