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3 - 3 Evaluation of Cost Efficiency

The indicator for evaluating the cost efficiency of an information processing system is TCO (Total Cost of Ownership). TCO is the total cost including all the costs that are incurred during and after system installation.

(1) Initial cost

Initial cost is a one-time cost that is incurred during system installation. The typical initial cost includes the following costs:

• • Hardware purchase cost
  This is the cost of purchasing hardware (i.e., equipment) configuring the system.
• • Software purchase cost
  This is the cost of purchasing software when commercially available software (i.e., a set of applications) is used with the system.
• • Software development cost
  This is the cost of developing software when software developed exclusively by one’s own company is to be used with the system. This cost is incurred as the personnel cost of development staff members when a product is developed in-house and as the outsourcing cost when another company is requested to carry out the development process.

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(2) Operational cost (running cost)

Operational cost (running cost) is a periodic/persistent cost that is incurred during the operation after system installation. The typical operational cost includes the following costs:

• • Hardware rental/lease cost
  This is the cost during lease of hardware (i.e., equipment) configuring the system.
• • Operator cost
  This is the cost of salaries paid to operators operating the system.
• • Facilities maintenance cost
  This is the maintenance cost for maintaining and managing facilities (e.g., the computer center and network environment.)

The direct cost refers the cost that has a direct relationship with the target, such as the hardware and software purchase cost. On the other hand, the indirect cost refers to the cost that has an indirect relationship with the target. This is not an absolute but a relative classification. For example, in the case of a full-time operator of the target system, the personnel cost of the operator is classified as a direct cost. However, in the case of an operator of the overall in-house system including the target system, the personnel cost must be classified as an indirect cost.