Many digital projects fail because of the need of of an estimation of the real costs at the time of budgeting. According to our flagship document “The Golden Opportunity of Digital Health for Latin America and the Caribbean,” 53% of big companies in the United States mentioned their digital projects overran their initial budgets. A project is not sustainable if it is not adequately budgeted for all of its lifecycle, including maintenance and optimization. An answer to this problem is conducting a Total Cost of Ownership (TCO) analysis, as we propose in a recent IADB document, “Beyond the Price Tag. Understanding the True Cost of Digital Health Tools”.
When someone buys a house, the closing price is not the only cost to consider. Among others, this person would be well advised to think of the costs of operation (taxes, utilities) and maintenance (paint, repairs). And since it is a long-term purchase, the person should think of the possible future evolution of this house: could a new bedroom be added for a new family member, for example, and how much would that cost? Likewise, the cost of a digital health project goes beyond the cost of acquiring or developing software, and it implies costs in the four stages of every project: preliminary studies; acquisition, development or adaptation; use and maintenance; and evaluation and closure (see image).
How TCO methodology improves the estimation of project costs
TCO is a methodology designed precisely to budget the total cost of projects throughout their lifecycle. Well estimated, it reflects the final cost of adopting a given solution, it helps to avoid unpleasant surprises and allows for better decision-making. Calculating all the costs that will be incurred in a system’s lifetime is not easy, but the document details a methodology and the IDB has developed an interactive digital solution to help practitioners with the estimation.
The basic methodology starts by putting conscious thought into the four stages and, in each of them, into the five cost categories of every digital health solution: internal human resources, external professional resources, infrastructure, licenses and other operating costs.
For each project stage and each category a number of tasks are identified; the quantity of resources needed for each task is estimated; a value is assigned for each resource; and then each resource quantity is multiplied by its unit cost and then all those values are added up. Depending on the project or the organization, indirect costs may or may not be added, and the results may or not be adjusted by inflation, exchange rates or a social discount rate.
More precise budgets yield more cost-effective projects
This standard methodology helps to normalize estimations and thus better compare different scenarios and implementation strategies. This is especially important in digital health projects, which correspond to three different types (solutions can be commercially purchased, built in-house or adapted), and where each of these types has different cost structures. For example, buying commercial solutions can be initially costlier but less so in the use and maintenance stage. Cost-benefit analyses can be much more solid if they are constructed considering the TCO and not just a part of those costs, and using the same estimation methodology for all competing projects.
The calculation will not be perfect –every estimation is an approximation– but this methodology allows for a number that will be closer to reality than the mere cost of acquisition. This allows for a better comparison between different projects, which is key to invest scarce resources in the way that is most beneficial for the people of the region. And although it is not a project management tool, it can help to avoid many projects from reaching dead ends because budgets were not appropriately calculated at the outset.
Ultimately, a more precise understanding of how much a solution costs using TCO analysis will allow us to drive more projects to successful ends and to better chose the most cost-effective projects, resulting in better health outcomes for the available budget. And the IADB’s total cost of ownership interactive calculator is a useful tool available for any organization to use this methodology.