There are many different ways to look at costs and classify them. There are external costs and internal costs, out-of-pocket costs and internal funds, and operational costs verses capital costs. There are expenses, and there is labor. Similar classifications can be established for savings, most notably hard and soft or tangible and intangible. But, if you espouse the belief that you have no savings until the overall bottom-line of the organization has been reduced; i.e., you have not had any staff savings unless there is an empty seat somewhere, then you need to know about the other costs that are typically associated with the acquisition and implementation of new systems.

Technology is expensive and will require a significant capital investment. However, at the same time technology can provide for business efficiencies, allowing staff to provide service in a more efficient and cost-effective manner. But, that does not mean costs will be less. Ongoing technology cost savings depend upon the level that current environment technology costs can be minimized.

Most of us have personal experiences which illustrate this point. It used to be that many of us could do minor repairs on our cars by ourselves. When it came time to consider the purchase of a new vehicle, we had to figure out if we could afford the monthly payments, but we typically didn't factor in the need for more expensive ongoing maintenance. In fact, if you had a car that was “nickel and diming you to death,” you might have even factored in those costs in your analysis of the new car payments. But, what has happened to many of us over the years is that the technology in automobiles has become so advanced that we can no longer do the minor repairs by ourselves. But, we might still have the tools we acquired and used on the old cars, including things like floor jacks, stands and specialized tools, which we end up moving around only when it is time to clean the garage. Therefore, we ended up increasing our ongoing costs while retaining our stranded investments.

We typically find that the ongoing IT cost to operate a new customer solution will increase in the range of $0.10 to $0.30 per customer per month. As an example, the ongoing costs for a utility serving 120,000 customers might increase from $720,000 to over $1 million annually.

This, of course, will vary for each utility depending on its individual circumstances. But, when a thorough cost-savings analysis is conducted following the installation of new systems, it is surprising how few utilities can realize any savings in ongoing costs. In order to realize a savings in IT costs, a utility would have to replace all of the hardware associated with the old system with newer, less expensive hardware (lower annual maintenance charges), eliminate outside contractor or vendor costs associated with the old system and not incur additional costs with the new system, and/or retrain and reequip the IT personnel who were operating and maintaining the old system and then operate/maintain the new system with fewer personnel.

Consider, for example, a utility that is migrating all of its systems off of a mainframe computer to smaller single-application or multiple-application servers. Until all of the applications are off of the mainframe and that mainframe is basically out of the door, there has been no savings in hardware costs. And, the annual maintenance charges associated with the new hardware and software might actually be more expensive than those which were associated with the old systems.

IT personnel costs rarely decrease. If a utility has practices which make it difficult to reduce IT staff when an application changes, simply moving that staff to other applications has not resulted in cost savings. In fact, many times the new skill sets that are required for the new systems may force a utility to hire new personnel, or contract with other vendors or contractors for those services. Waiting for natural attrition as the only means to reduce staff can be very inefficient. All of this points to actually increasing personnel costs.

One utility we were working with completed the following “additional personnel” analysis on the solutions it was considering. This utility realized that moving from its old legacy system would require an investment in IT personnel. It factored in estimates of annual salaries for basic positions, along with benefit and welfare costs and annual training costs. Some of the training costs considered turnover frequency and costs to attract and obtain new personnel:

Applying these annual costs, the utility arrived at rough estimates of how much their annual IT personnel costs would increase with a new system:

Solution 1 In House			Solution 3 Facility Management			Solution 7 Outsourced			Solution 8 Remote Facility Management
# of Staff	Annual Cost		# of Staff	Annual Cost		# of Staff	Annual Cost		# of Staff	Annual Cost
1	$116,000		-	$0		-	$0		-	$0
1	$89,000		1	$89,000		-	$0		1	$89,000
4	$317,000		1	$79,250		0.5	$39,625		0.75	$59,438
1	$57,700,0		-	$0		-	$0		-	$0
	$0		-	$0		1	$82,250		-	$0
1	$65,750		1	$65,750		1	$65,750		1	$65,750
2	$126,500		4	$253,000		1	$63,250		-	$0
	$0		0.5	$31,625		0.5	$31,625		0.25	$15,813
10.0	$771,950		7.5	$518,625		4.0	282,500		3.0	$230,000

The personnel numbers and resulting costs in the table above are not meant to be compared between the four solutions, as all four were different applications with differing modes of delivery. However, the table does reflect the fact that, if the utility were to consider solution 1, it may need to add 10 persons to its staff at an annual cost of $771,950. But, if it were to select solution 8, it would only need to add three persons at an annual cost of approximately $230,000.

There are a few other technology costs that tend to get forgotten with the installation of new systems. In addition to all of the costs associated with bringing up a new system, such as new interfaces and integrations, many utilities fail to recognize the ongoing annual costs to maintain those integration points. There may also be specialized third-party software in which IT personnel might require continuing education. And, that third-party software may also have to be periodically updated.

Also, there are some costs other than technology which are sometimes not considered. During the implementation itself, a utility will experience salary costs and expenses for its core team and subject matter experts. Loaded salary costs (including welfare and benefits) should be considered for all of the time the existing personnel will be working on the implementation activities. There may also be incentive or overtime pay for some of these personnel. Also, the utility may experience some significant out-of-pocket expenses, including project facilities, training facilities, internal and external marketing campaigns, communication costs, temporary or back-fill costs, etc.

Remember, when solution vendors give you estimates, or even final costs, for new applications, there are many other costs that need to be factored into the equation. If you are attempting to do an ROI or pay-back analysis, or any type of cost benefit analysis, make sure you factor in the true ongoing costs and all of the non-vendor related implementation costs.

New technology can be the impetus of change, and has been the driving factor for the advances we have seen in our world and in our companies. Companies that continue to limp along with old technology will not be the market leaders in the future. But there are costs associated with new technology, and the knowledge of those costs will make you successful.

Gary Weseloh is a Vice President and Senior Consultant with TMG Consulting. He has over 30 years of utility experience, including the management of customer systems (CIS, meter reading, remittance processing, complex billing) at a large combination utility, consulting on mobile computing/field work automation, and extensive selection, evaluation and installation oversight projects with TMG Consulting. He can be reached at garyw@tmgconsulting.com.