In an economic environment where cash is tight, tolerance for risk-taking is low, and demand for payback is high, business and IT leaders alike can struggle desperately with understanding what the total cost of ownership (TCO) is for their web development initiatives….not to mention whether the returns on those technology investments are worth the use of company cash. Leaders can grow bewildered over:

• Understanding the various types of costs that come with a technology investment. What are all the cost components? What sort of labor, hardware, software, and training costs are required for the IT initiative?
• Knowing what benefits the technology investment will generate. What are the specific improvements that the IT initiative will bring? Are they productivity-based, revenue-based, cost savings-based, or a combination of some or all?
• Estimating how long costs and benefits will be expected to last. Will costs and benefits be one time or recurring? If they’re recurring, how long will they last, and will they fluctuate over time?
• Figuring out ways to account for risk. How can risk be accounted for? What is the impact of risk on the IT investment as a whole?

Undoubtedly, understanding the TCO for any type of technology project can be time-consuming and highly complex. To help unravel the intricacies of web development TCO, Verndale suggests business and IT leaders follow a six step process.

1. Think strategically about your IT investments before funding them. Any business initiative begins with a strategy. Before selecting or implementing a solution, define what your business goals are and how the technology will support them. Having a well-articulated, clearly defined strategy at the outset will greatly assist you and your team in defining parameters around the solution you pursue, as well as narrowing in on its TCO. 
2. Wrangle down high-level project scope. Attack scope definition by discussing functionality requirements across business units, and identifying areas of cross-over needs. By identifying cross-over areas, leaders can begin to prioritize functionality, sketch-out project scope, and detail solution requirements.
3. Define a time period that measures project value. In general, IT projects tend to have a useful life of 5-7 years before a major re-investment initiative -- like an application upgrade or re-platforming effort -- is required. Valuing the project over a 5-7 year timeframe helps organizations understand costs over the long haul and reins in benefits over a shorter period so that IT initiatives aren’t underestimated or benefit expectations misjudged.
4. Itemize and group costs and benefits. Nearly all IT investment costs can be broken down into four major categories: labor, hardware, software, and training. Labor costs can be further broken down into multiple, activity cost sub-categories like: requirements gathering, core development, systems integration, and system configuration. Similarly, benefits can be broken down into three major categories: revenue increases, productivity gains, and cost savings. And like labor costs, the benefits categories can be broken down further by labor activities used to generate positive results: like increased deal throughput for increased revenues, or reduced activity costs for order processing.
5. Adjust for risk. In any project where future costs and benefits are being anticipated or forecasted, there’s always an element of future risk that can derail the project’s expected value. After identifying the benefits and costs, set aside ranges of probability for each of those benefits and costs. Measure anticipated benefits as a range (like 75- 100%) as a starting point. Conversely, costs are often underestimated in IT project TCO….sometimes drastically. To avoid this type of pitfall, consider that your initial cost estimates are actually the “best case”. Then create a “worst case” upper range that captures what’s possible…but not highly unlikely (like 150-200%).
6. Challenge and revise assumptions. After you’ve built your TCO model, review it with other stakeholders within your organization to validate and refine assumptions. Other reviewers’ input can help you stress-test the model and zero-in on accuracy so that you and your firm have a strong level of confidence that the TCO model depicts your IT project’s costs and benefits accurately.

Forecasting the future is always difficult and rarely precise. By strategizing business intent, scoping high-level project requirements, and vetting out assumptions amongst peers, organizations can make better IT project decisions with increased levels of certainty and comfort. Use Verndale’s six step TCO process as an initial framework to help you manage and understand the TCO of your technology investment.