Orchard’s white paper, Total Cost of Ownership for a Laboratory Information System, discusses TCO throughout the lifetime of the LIS. In addition, other commonly used financial tools, such as payback analysis, net present value, and economic feasibility are introduced. As part of the TCO determination, you need an understanding of the basic types of both tangible and intangible costs and to be familiar with economic feasibility and cost/benefit analysis.
Direct costs are much easier to identify and quantitate and are likely to already be in your budget categories. Conversely, indirect costs are more difficult to define and may not be listed in a specific budget category. Examples of indirect costs include staff time spent in training or in helping others to learn and loss of productivity due to scheduled or unscheduled downtime.
Avoiding direct costs upfront by declining to have a maintenance contract will lead to undefined indirect costs later whenever failures occur. After considering the indirect costs, which are not always apparent, a system that seems inexpensive initially might actually turn out to be the costlier choice.
Another tool to determine project feasibility is a cost/benefit analysis. The three most common methods used to perform a cost benefit comparison are: 1) payback analysis, 2) return on investment (ROI), and 3) net present value (NPV).1
A payback analysis is simply a measure of how long it takes for an information system to pay for itself in added benefits. In contrast, ROI considers costs and benefits over a longer time period than payback analysis. ROI includes the percentage rate appropriate to measure profitability. It compares total net benefits (return) with total costs.
Net Present Value
Another important way to consider cost of a software product or IT project is to look at net present value (NPV). NPV takes into account that the value of a dollar today and the value of a dollar in the future are not the same. NPV is the current value of a project at the required rate of return compared to the initial investment. A positive NPV is what we want to demonstrate a successful project or undertaking and is one way of calculating ROI. By calculating the expected return of a project and translating those returns into today’s dollars, you can decide whether the investment is of value. To calculate NPV, you subtract money spent and add monies received. Internal rate of return (IRR) is the interest rate at which the NPV of both positive and negative cash flow equals zero. Decisions are better informed by considering the true present value of the costs rather than only considering the current sum of the costs.
An investment is considered economically feasible if the benefits outweigh the costs. To determine a project or IT investment’s economic feasibility, TCO must be considered.
Download the White Paper for More Details
|Orchard’s white paper, Total Cost of Ownership for a Laboratory Information System, discusses TCO throughout the lifetime of the LIS, including startup, operational, and retirement costs.
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