John Wilson discusses the apparent and actual costs of software acquisition, and points out the areas to consider when the auditor or his client embark on a software purchase.
"Most people are fully aware that the purchase of software entails a larger cost than just the initial selling price of a software package. The question is, how much more? What elements should be considered? What intangibles are there? How does one make a valid cost comparison between package A and package B? Are the tangible costs and the intangibles the same between alternative products? All these questions need to be asked when choosing a software package that may have a significant impact on the productivity of the partnership or company.
Probably the most important issue to resolve is the question: "What proportion of the total cost of ownership is the selling price?"
It is the same when you buy a printer, for instance. There are always running costs after buying one: there is the paper, re-inking and maintenance costs. Some printers run for years without giving problems and others are continually malfunctioning and requiring maintenance. This analogy might be a tad simplistic, but it serves to illustrate a point.
There are naturally also hidden costs when it comes to software, particularly those systems which require stationery from the supplier. Payroll systems are a good example of this type of system, tax and secretarial management systems are two others.
Other tangible costs to consider include:
* Training operators, both at the initial start-up stage and when staff change or leave - or when illness necessitates re-training.
* Installation and ongoing support. Is it contracted or casual? What are the charges -- including the exclusions -- and what is the escalation pattern of these support charges.
* What, if any, hardware upgrade costs are entailed to bring the PC or PCs to be used for the job up to the requirements of the package?
* What is the cost of keeping the software current? Most software is continually developed, and new versions are released periodically. While previous versions are supported for a certain period of time, they will eventually be withdrawn from support, leaving the user no choice but to upgrade to the latest version, often at an unexpectedly high price. The most cost-effective way to prolong the life of the package is usually to upgrade to each new version as it is announced, taking advantage of the usual special launch price. Some upgrades are provided automatically within a licence or maintenance agreement. It pays to find out.
The total of the costs listed above will almost always exceed the price of the software package, so it is important not to treat them as incidentals - because they clearly are not.
Intangible costs are even more of an issue
But there are also other issues to consider when purchasing any software system, including an accounting system. Consider the cost of `buy-in` on the part of your employees or clients. If the software produces results that are understandable and informative, then there will generally be a high level of acceptance. If, however, the system makes life difficult for the users, an astonishing degree of hostility may occur. Many surveys of customer satisfaction have highlighted how angry customers can become when a simple document like an invoice is difficult to understand, and how much they equate good service with easy to read accounts.
The cost of reversing this kind of perception will be markedly higher than any other costs related to the package. So beware -- this often-overlooked factor could become your highest cost related to a software purchase.
Other intangibles include:
* The disruption caused by unfamiliar routines imposed by the new software;
* The cost of doing nothing while a software gremlin is being sorted out;
* The degree to which the software authors subscribe to the maxim that `hardware is cheap -- new versions should always be written for the most advanced and latest computers`. This factor can result in the user being caught up in a continual cycle of expensive hardware upgrades over the life of the product;
* The life span of the software. For accountants this may be a little-understood factor as they are generally used to accounting and office management systems which have life spans of many years. Be careful though: planned obsolescence and the throw-away society have come to software as well, and many modern packages are written with a life expectancy of only two to three years.
The intangible costs are naturally the most difficult to quantify into a costing exercise. My best advice is to ask a lot of questions, then make the best judgement you can. But don`t ignore intangibles, factor them into your purchase decision.
In summary, treat the purchase or recommendation of a software package carefully. Like the cellular phone, the camera (where costs of film and processing are always greater than that of the most expensive camera) and the second-hand motor car, software price is not what it seems. Direct and indirect costs outside the purchase price are usually much higher than expected -- and the wary auditor, or general user, should do his homework to unearth these costs before purchasing."
Share
Editorial contacts