Total cost of ownership (TCO) is something you’re going to hear more and more about in these tough economic times. But how can you apply the concept to your IT without employing an expensive consultant?
In terms of IT, perhaps the best definition of TCO is the total cost of a computer asset or solution throughout its lifecycle, from acquisition to disposal. In its simplest form, this means that when you assess the cost of technology you need to understand all of the costs – and they are many – in assessing, buying, managing, maintaining and using that solution. It is not just the initial purchase price that should be considered when making procurement decisions.
Whenever you are making a technology purchase decision, it is important to undertake some form of TCO analysis before opening up the coffers and parting with your hard-earned capital.
A key element to making the right choices is to have some understanding of the full cost that comes with a solution.
As a basic example, think of your printer. Printers have become a commodity and generally have a very inexpensive entry price. Where you may think you are reducing costs by buying a less expensive unit, that benefit can be quickly negated if the ink consumables required to keep it working are expensive and frequently required.
A complex assessment
Assessing the TCO for technology, however, is a much more complex concept than just individual pieces of hardware and software. It penetrates every aspect of your business and includes key considerations such as the training of staff and the amount of customisation required or downtime that comes with certain applications. There are numerous instances where an organisation shoots for a low-cost option only to find that it didn’t work or doesn’t perform up to expectations after they have trained all their staff and incurred all of the costs involved in migrating to the new solution. Unfortunately, these organisations have had to go back to the market and find an alternative solution that does do the job. This is money lost forever.
That’s not to say that going for the most expensive option is always the way to go either. Companies investing in Rolls Royce technology solutions to deliver on fairly basic business needs are burdened with hardware and applications which can deliver a host of features that will never be used. Over-investment in technology can also be a significant waste of money; capital that would have been far better spent elsewhere in the business.
Keeping a lid on IT spending is a challenge for growing businesses. Knowing what portion of this investment is keeping the business going and how much of it is helping to generate new efficiencies to drive the business forward, will help to transform IT from a cost centre to a business enabler.
Undertaking a TCO analysis on all of your IT operations is a great way to get a handle on exactly how much IT is costing your business and what sort of benefits it is delivering. Once you have collected this data you can analyse it and start to see where you can cut costs and where additional investment will help to drive business success.
How to analyse
A TCO analysis should be approached in a similar way to producing a business plan. It needs to involve a table of all costs and benefits through a defined timeframe. This process starts with knowing what all of your technology assets are and how they are being used. Looking at IT from a business perspective is a very good exercise for any business to embark on because it starts to highlight what your core requirements are from IT as well as where you are gaining benefits from its use and where it is costing you money.
Hiring an expensive consultant to complete this task is not essential. One way to document your TCO is to start by tabulating every piece of hardware and software as well as services and/or personnel you have engaged to support IT (see the Elements of a TCO Analysis list). You then need to assign comprehensive cost and benefit figures to each item while being careful to allow for all of the indirect and hidden costs such as power, cooling and idle time while out of action, starting-up or closing down.
This analysis will lay the foundation stones for a better understanding of the role IT plays in the success of your organisation. You will be able to work out which components of your IT are providing better value than others and which parts may require a new solution to reduce the TCO and better support your business objectives.
Often the first great benefit you will receive from such an audit is to identify a whole range of assets that are being under-utilised or not being used at all and when you look closely you will find that these are all costing you time and money in some form or manner. Straight away you can start racking up cost reductions by consolidating these unproductive assets and getting rid of the dead wood.
As the result of conducting a thorough TCO analysis, you will be armed with information about past mistakes and successes. This is valuable knowledge to help make prudent future technology purchasing and investment decisions. You will also have a much clearer view of the many hidden costs in your technology assets which vendors conveniently neglect to tell you about. This offers opportunities to start reducing or eliminating some of these costs which will help produce a healthier value equation.
TCO analysis on information technology is an integral part of deriving optimum value from your IT investments and through this process will deliver you a much better understanding of what your IT is doing for you. The trick to leveraging IT for business success lies in making sure that you are getting the best value out of your systems, applications, services and people. Therefore, it is a compelling argument to calculate the value IT delivers your business and know exactly what it is costing you.
-Dan Drum is managing director of Melbourne-based asset management software developer Hardcat (www.hardcat.com).
Elements of a TCO Analysis
Some of the considerations involved in a TCO analysis would include:
- Hardware purchase costs
- Software license purchase costs
- Hardware and software implementation/deployment costs
- Hardware warranties and maintenance costs
- Software license tracking costs
- Operations infrastructure costs
- Cost for electricity and cooling
- Network hardware and software costs
- Server hardware and software costs
- Cost to upgrade or scalability
- Backup and recovery process costs
- Costs to your business associated with failure or outage
- Diminished performance incidents
- Migration and training costs
- Data maintenance costs
Questions to ask before making any technology investments
1. Do you need it?
2. What do you need it for?
3. What is it going to do for the organisation?
4. How much is it going to cost through its full lifecycle?
5. Is it going to generate revenue for the organisation?
6. Are we going to lose revenue if we don’t have it?
7. What sort of ongoing support is required to manage and maintain it?
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