Where have all the dollars gone?

Following a period of price decreases, the cost per user seems to be rising; it's not certain whether the trend will continue


In the era of the minicomputer, initial costs of $8,000 to $10,000 per user were common. With the advent of PC local area networks (LANs), prices plummeted. Since 1990, bids of $5,000 to $6,000 per user have been the norm.

Yet during the past year or two, as I helped clients select and buy new systems, I started feeling that prices were going back up. It seemed that the $5,000 end of the range was harder to achieve, and $6,000 was becoming the starting point.

Deciding to investigate, I was able to find two proposals for similar-size law firms from a well-known network integrator. The 1992 proposal was for a Novell NetWare LAN and DOS workstations. The 1996 proposal was for Microsoft NT Server and Windows 95.

The accompanying table shows per-user costs in major product and service categories. To simplify the analysis and make the bids comparable, the table excludes in-wall cabling; printers; sales tax; hardware maintenance and ongoing support. These items would add approximately $1,000 per user to both bids.

Comparing prices

Overall, hardware and software costs went up about 10 percent. Networking hardware prices decreased 21 percent -- for a 1996 network with 10 times the speed of the 1992 system.

Server pricing decreased 9 percent -- not bad for a Pentium/120 server with six times the main memory and disk storage of the 486/33 server proposed in 1992.

PC workstation prices went up 10 percent. That increase buys a Pentium/90 rather than 386/33 processor, four times the main memory, 10 times the hard disk storage and a local-bus, SuperVGA color display rather than VGA.


The almost tenfold increase in external communication costs is deceptive. In 1992, there was a single line for outgoing (legal research) and incoming (vendor support) telecommunications. In 1996, there are four lines for incoming and outgoing communication (add Internet access and dial-in from home) plus a fax server.

The network operating system cost declined 25 percent because Microsoft developed a credible competitor to NetWare and drove prices down aggressively.

Application software went up 10 percent. In 1992, the products of choice were WordPerfect 5.1, SoftSolutions document management and WordPerfect Office. 1996 applications include the Microsoft Office 95 suite and Docs Open.

Checking out services

Overall, prices for services went up 89 percent. System design and management went down 11 percent. However, delivery, installation and integration went up 102 percent, while training and documentation increased by 172 percent.

There are several reasons for these increases. First, contemporary systems are more complex than their predecessors. Integration takes more time, as does training. Just think about how easy WordPerfect 5.1 was to master. In contrast, few people ever master today's feature-laden word processors -- there are just too many things to learn.

Second, products are changing more rapidly, so integrators need to invest more time in understanding products. Furthermore, rapid change makes it harder for integrators to move their way along the learning curve to achieve the productivity improvements.

Finally, there is little profit margin left in selling products. Except for the rare "category killer" that can command a premium, most hardware and software is approaching commodity status. If integrators cannot make their money on products, they have to increase the price of services.

So it turns out the price increase is real. Whether this latest trend will continue is unclear. Let's plan on revisiting the issue in another four years to see what happens.

Dana H. Shultz is an Oakland-based lawyer, certified management consultant and speaker specializing in office technology and online marketing. He may be reached by e-mail at and on the World Wide Web at