Total Cost of OwnershipTCO and Return on Investment ROI

Corporations are becoming more cautious on how they spend their money and sponsors almost always require TCO and ROI estimates. By the end of the envisionment phase, a detailed schedule for the design phase should be created and the goals should be clearly defined. Using this information, we should be able to estimate the total cost of the project.

Creating accurate estimates at this stage can be very difficult. We have no solution yet, only goals. We may be able to quantify some of the benefits from the goals but we will only know something about the magnitude of what we want to accomplish once we've done our design and know how the product is going to be built. It is only at this stage that we will be able to put together accurate development estimates. Having said all this, it is unlikely that the sponsor will be willing to proceed to the design phase with just a set of goals. Some estimation of the cost of the project will have to be made.

In basic terms the TCO is the total cost of investment in an IT asset (such as an operating system). The ROI compares the cost of the investment to the additional profit made by the investment. For example, for an ecommerce site the cost of the investment will be the cost to build the e-commerce project and the TCO (cost of licenses for the operating system, web server and the e-commerce software, the cost for maintaining the site, etc.). Increased sales by having wider access to clients and a decrease in the number of operators required to take orders are all ways the investment can increase profit. If the total cost of the investment is less than the additional profit, it is a good investment.

The Gartner Group does estimates for the cost of computers in a networked environment that can be used to determine some of the hardware costs. There are some software tools that can provide estimates for software, such as Price Systems. Creating a schedule with Microsoft Project 98 will also provide you with a tool to estimate the cost of resources, such as team members. Microsoft provides a spreadsheet tool called "TCO/ROI Desktop Advisor". It can be downloaded from the following site:

http://www.Microsoft.com/office/tco/

It allows you to perform TCO and ROI estimates for desktop applications and operating systems:

The wizard walks you through the data entry process then performs the calculations and produces a report:

Return Investment Visual Example

The larger a project is, and the longer it is expected to take, the more difficult it is to estimate the cost of the project. If a project is not broken into cycles but consists of one long development phase extending over several years, it is a much more complex task to estimate costs accurately. If you have any doubt about this, go to your favorite computer dealer and get an estimate for the cost of one specific computer. Check the price of the computer every two months. As new hardware comes out, you can watch the price of the computer drop. Trying to estimate costs two years in advance is very difficult. Even worse, the technology may have completely changed over a single year. New versions of software, or new types of software such as SQL Server 7's data warehouse may make a plan completely obsolete.

By building the project in short cycles, it is unlikely that we will find ourselves using outdated technology or methods in the middle of our project. Our estimates of the cost of the project should remain fairly accurate over a short cycle. The estimate for the next cycle of the project will be the most accurate, the estimate for the entire scope will be less accurate and the estimate for the entire system to be built according to the vision will be the least accurate. Using the cyclic methodology will help us make fairly accurate estimates of the costs of each project of the system.

When making an estimate of the costs of a project, you should make a detailed estimate of the cost of the cycles you are about to design. Future cycles should only have a general estimate, which will be refined when it comes time to actually begin the cycle.

There are also unexpected expenses, such as down times, equipment failures, etc. These should be taken into consideration, included in the risk document, and figured into the total cost of the project.

It sounds like stating the obvious but the safest way of securing a positive ROI is to choose a project where the estimates indicate that there will be a very high ROI. Even in cases where there are unexpected expenses or additional costs, a project with a high ROI estimation will still usually give a significant return. Projects that increase productivity, reduce costs, improve customer service, etc., are all projects that have the potential for a high ROI.

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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