Total Cost of Ownership (TCO): How to discover the true, hidden cost of software and make smarter investment decisions.

In the process of deciding whether to build or purchase new software, the attention of business and technology leaders is naturally focused on the single most visible element: the initial cost of implementation. Sales teams of software vendors present attractive license price lists. Software companies present detailed cost estimates for development work. Finance departments compare offers and try to choose the one that looks most favorable on paper. However, this initial invoice, while often amounting to significant sums, is just the tip of a massive iceberg. The true, long-term cost of owning and maintaining software is much higher and consists of many hidden, often difficult to predict elements that materialize over the entire life cycle of the system.

Ignoring these hidden costs and making investment decisions based solely on the initial price is one of the most common and costly mistakes organizations make. This leads to a situation in which a seemingly “cheap” solution in five years’ time turns out to be a financial bottomless well. In contrast, a solution that seemed “expensive” at the outset may prove to be much more cost-effective in the long run due to lower maintenance costs and greater flexibility.

A discipline that avoids this pitfall is Total Cost of Ownership (TCO) analysis. This is an analytical approach that seeks to identify and estimate all costs – both direct and indirect – associated with software throughout its lifecycle. This article is a comprehensive guide for leaders – Chief Procurement Officers, CFOs, CTOs and CEOs – to understand what components make up true TCO. We’ll show you how to analyze them and why working with a strategic technology partner that thinks about TCO from the outset, not just development cost, is the key to making smarter investment decisions.

Why does the iceberg metaphor perfectly describe software costs?

The iceberg metaphor perfectly illustrates the TCO issue. What we see above the surface of the water – that is, the initial cost of buying a license or building an application – is only a small fraction (often 15-25%) of the whole, hidden underwater lump. The real mass and the real danger are hidden in that part that is invisible at first glance.

• Above Water (Visible Costs – CapEx): These are direct and one-time costs. In the case of custom-built software, this will be the cost of the development team (analysts, programmers, testers) needed to create the first version of the product. In the case of off-the-shelf software, it will be the cost of purchasing licenses and basic configuration. These are relatively easy costs to estimate.
• Beneath the Surface of the Water (Hidden Costs – OpEx and others): This is where the real challenge begins. Hidden here are long-term operating, indirect and hidden costs. These are the ones that are most often overlooked, and they are the ones that have the greatest impact on the ultimate profitability of an investment. These include the costs of infrastructure, maintenance, support, technology debt management, training, lost productivity and much more. A company that chooses a seemingly cheaper solution, but fails to take into account its much higher maintenance costs, is actually choosing a much more expensive path.

What are the key, hidden components of the Total Cost of Ownership (TCO) of software?

TCO analysis requires methodically identifying and estimating all potential costs that will occur over the life cycle of an application, which is often 5 to 10 years. Below are the most important categories of these “hidden” costs.

Category 1: Costs of infrastructure and environments

Every application, in order to work, needs infrastructure. In the traditional on-premise model, these were the costs of purchasing and maintaining physical servers, arrays, network equipment, as well as costs associated with the server room (electricity, cooling). In the world of public cloud, these costs take the form of a monthly bill from the provider (AWS, Azure, GCP). However, this bill is not just the cost of virtual machines. It’s also the cost of development and test environments, the cost of data storage, backups, data transfers (especially expensive outbound transfers), and the cost of additional services such as managed databases and message queues. Failure to take all these elements into account at the design stage can lead to a huge shock when the first cloud invoice arrives.

Category 2: Maintenance, support and monitoring costs

Software, once implemented, requires ongoing maintenance. This is the cost category that is most underestimated. It includes the team work needed to fix bugs (bug fixing). It also includes end-user support – support tickets and troubleshooting. Monitoring and observability costs are also a key component. To ensure system stability, advanced tools must be deployed and maintained, and engineers must be paid (often 24/7) to respond to alarms. For off-the-shelf software, there are annual support costs, which are often a significant percentage of the initial license price.

Category 3: Evolution and change management costs

The world does not stand still. Once an application is implemented, very quickly there are needs for its further development – adding new features, adapting to changing legislation or integrating with new systems. These evolutionary development costs often exceed many times the cost of building the original version. How high they will be depends enormously on the quality and architecture of the original solution. A system built “cheaply and quickly,” burdened with a huge technological debt, will be extremely expensive to modify. In contrast, a system built from the beginning with attention to quality and flexible architecture will be much cheaper and easier to develop further.

Category 4: Human and organizational costs

TCO analysis must also take into account “soft” costs. These include the cost of training – both for end users and for the IT team. The potential cost of lost productivity during the transition period, when employees are learning a new tool and adapting to new processes, must also be considered. In the case of poorly designed systems, this productivity loss can be permanent and generate huge hidden losses.

How does ARDURA Consulting help you make smarter investment decisions?

Most development companies are naturally motivated to focus solely on the initial cost of implementation in the sales process, leaving aside the discussion of long-term TCO. Choosing a strategic technology partner like ARDURA Consulting, which thinks in terms of Total Cost of Ownership from the outset, is a fundamental qualitative change and safeguards your investment.

Our philosophy is based on building long-term partnerships. Therefore, in the analysis and design process, our architects and analysts place great emphasis on the elements that have the greatest impact on future maintenance and development costs.

• TCO analysis support: Before we write the first line of code, we help you build a full TCO model for your planned investment. Our cloud experts help you accurately estimate future infrastructure costs, and our architects analyze different approaches (e.g., monolith vs. microservices) for their long-term cost implications. We act as your trusted advisor, helping you make an informed choice.
• Software Development focused on low TCO: When we deliver a project for you under the Software Development model, our goal is not to build it “as cheaply as possible,” but to build it “well.” This means investing in clean architecture, high quality code, test automation and DevOps practices. Such an investment in the beginning, pays off many times over in the future in the form of lower maintenance costs, easier development and fewer bugs.
• Optimize existing systems by Staff Augmentation: For companies that already have systems with high TCO, we offer support from our experts in the Staff Augmentation model. We can provide Architects to perform refactoring, DevOps Engineers to optimize cloud costs (FinOps) or Senior Developers to pay off technology debt.

Our goal is your long-term success, not just closing a project. We understand that only this approach builds true trust and lasting business relationships.