The real cost of e-business

E-biz buzz

One of the more significant roadblocks to e-business is that IT managers and business leaders have continually underestimated the costs of e-business systems. Underestimating costs is not a new thing, and it is endemic in IT. Major implementation efforts such as ERP highlight two key rules of IT financial management: Implementation of new systems usually costs more than expected; and the ongoing costs of systems through their life cycles are typically 40 per cent to 60 per cent of the implementation costs per year.

Readers may disagree with the percentages I’ve presented above. I am the first to admit that these are rough estimates, but it is hard to argue with the basic premise if you’ve spent time in IT.

Underestimating implementation costs is not as big a problem as underestimating maintenance and operation costs. Most organizations have gotten pretty good at project-cost estimation, and they are able to trim costs along the way to keep the project on track financially when necessary. But it is the underestimation of ongoing costs that is most damaging, both to IT budgets and IT credibility.

Here’s a typical scenario. A company decides to invest in a CRM system, so it budgets US$1 million for the implementation (including hardware, software, and staffing expenses). The system goes in without a hitch. But in the system’s second year of operation, the company must spend US$500,000 to maintain and integrate that system. The result is that CRM has not only cost the company US$1 million to implement, but has added a significant yearly hit to the baseline costs of the IT organization.

Multiply this ongoing cost by the number of new e-business initiatives and you have a substantial drain on IT financial resources. Consider also that most companies add new applications all the time, but rarely get rid of old ones. What happens over time is that more and more money is spent to simply maintain the existing application portfolio, making the company’s baseline IT costs higher, thereby shining a brighter light of scrutiny on IT executives, who are left asking themselves why their baseline costs are going up and up. And as baseline costs increase over time, less money will be available for new initiatives or discretionary expenditures.

This situation can be improved upon in a couple of ways. First, realistically estimate the ongoing costs of applications from the outset. Take your best estimate, and then double it. Second, push ongoing application expenses back to the business units, wherever possible.

In the case of CRM, marketing and sales may be appropriate candidates to absorb (read: pay for) much of the ongoing costs. Finally, get serious about retiring applications that are no longer useful. Often, the decision to sunset an application is one that must be made by the business unit, but the business unit can be nudged by IT. Doing these things won’t change the fact that ongoing costs of e-business applications are significant; however, it will help IT gain a better understanding of its long-term baseline costs.

Barb Gomolski is a research director at Gartner Inc., a research firm in Stamford, Conn. Contact her at