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CHIPS Articles: Best Practices for IT Pricing

Best Practices for IT Pricing
DoD ESI offers a proven model for software acquisition
By Floyd Groce and John Zettler - July-September 2013
It’s often a struggle for information technology buyers to secure the best price for commercial software and related services. To help solve this problem, the Department of Defense Enterprise Software Initiative (DoD ESI) team offers commercial best practices and tools, including a proven model for software acquisition, to obtain best value for IT purchases.

Research, planning and analysis are the keys to successful IT acquisitions. Initial acquisition cost is only one of the many costs incurred, and it is generally less than 50 percent of a program’s total life-cycle cost. The remaining costs, such as professional services, hardware maintenance, software maintenance/support and software assurance, are equally important but are often overlooked.

This experience is comparable to that of consumers who buy cell phones. A smart phone purchase can cost $100 to $200 out of pocket initially, and that may seem like a lot. However, with the arrival of the first monthly statement comes the realization that the purchase price was just the tip of the iceberg. There are fees for voice minutes, data, text messages — and more — depending on the features selected. There is also a penalty fee for early cancellation of the contract. All things considered, over the course of a standard two-year contract, the initial purchase is just a small percentage of a smart phone’s total cost.

Similar scenarios can occur with IT acquisitions. That is why it is important to follow the DoD practice of life-cycle cost analysis, or total cost of ownership methodology. This is a time-phased approach to analyzing the cost of an IT acquisition to determine affordability, budgetary requirements and best value. It is recommended that, to gain a better understanding of the total cost of a complex IT acquisition, the analysis be performed by a cross-functional team composed of members with expertise in fields like financial management, budgeting and contracting, as well as acquisition. A cross-functional team will be better equipped to analyze the cost of a solution over time.

The period of ownership projected for price analysis should be tailored to fit the situation. For a smaller acquisition, the timeframe can be short, ranging from less than one to as many as five years. For a major IT system implementation, the analysis should cover the expected life of the system – starting with the year when costs are first incurred and ending with the last year of the expected system life. It is necessary to analyze the extended period to avoid choosing a solution that is less expensive in the immediate or short-term, yet costs significantly more over time. Please refer to the DoD ESI white paper "Best Practices in Evaluating IT Acquisitions" for additional information on selecting a cost analysis team and conducting analysis.

It is critical to capture costs accurately to support analysis. It is recommended that a spreadsheet be employed, so that costs can be broken down by each year of ownership. Costs should be analyzed in two ways: by functional category and by frequency of occurrence. Functional cost categories vary from project to project but the following are examples of what needs to be tracked: costs for direct acquisition, ongoing services, infrastructure, and operations and maintenance/sustainment. The frequency of occurrence for each of these costs must be identified as either non-recurring (one time), or recurring (incurred more than once in a given period). When all project costs are identified in a spreadsheet, they may be evaluated in a variety of ways. This method can be used to evaluate a single solution or to compare multiple alternatives to determine the most cost effective.

The IT acquisition process can seem overwhelming, but proper research, planning and analysis will enable choosing the right solution for the right price. With its process descriptions and many examples, “Best Practices in Evaluating IT Acquisitions” is a great guide to start you on the path to success.

Additional Resources:
The “Best Practices in Evaluating IT Acquisitions” white paper is available on the DoD ESI website at Posted with the white paper are workbooks and exercises to assist in analyzing IT pricing and best value and a model developed for independent government cost estimates of enterprise resource planning implementations.

Floyd Groce is a member of the DON CIO Efficiencies and Analysis Directorate, Efficiencies Branch.

John Zettler provides contractual support to the DoD ESI.

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