Cloud Migration and Cost Allocation
A mid-sized manufacturing company is migrating its on-premise ERP to a cloud-based SaaS solution. The project has a budget of $2.5 million over three years. The IT department has proposed a migration plan that includes a lift-and-shift approach for most applications, but the finance team is concerned about the lack of detailed cost tracking. The CFO wants to ensure that the total cost of ownership (TCO) is accurately calculated and that costs are allocated to the appropriate business units. The IT team has provided estimates: $1.2 million for subscription fees, $800,000 for implementation services, and $500,000 for internal labor. However, these estimates do not include potential downtime costs, which are estimated at $50,000 per day of disruption. The migration is expected to cause 5 days of downtime. Additionally, the finance team has identified that some business units may not fully utilize the new system, leading to potential underutilization costs.
1. Calculate the TCO for the cloud migration over three years, including the estimated downtime cost. Show your work.
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TCO = Subscription fees + Implementation services + Internal labor + Downtime cost. Subscription fees: $1,200,000 Implementation services: $800,000 Internal labor: $500,000 Downtime cost: 5 days × $50,000/day = $250,000 Total TCO = $1,200,000 + $800,000 + $500,000 + $250,000 = $2,750,000. Note: This exceeds the budget of $2.5 million by $250,000.
2. Identify two additional costs or risks that the finance team should consider in the TCO analysis, and explain how they might affect cost allocation to business units.
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- Underutilization costs: If some business units do not fully adopt the system, the company may pay for unused licenses or capacity. This cost should be allocated based on actual usage or forecasted usage to avoid subsidizing underutilizing units. 2. Training and change management costs: Not included in the estimates. These costs may vary by business unit depending on their current processes and readiness. Allocation could be based on the number of users per unit or the extent of process changes required. Both costs can distort cost allocation if not properly assigned, leading to unfair chargebacks and potential resistance to the migration.