Know Your IT Total Cost Of Ownership And Its ROI

Working on a hi-tech server
What to keep in mind when trying to determine the TCO of technology for your small business

When deciding on whether to go with one technology provider or another, total cost of ownership (TCO) is a major factor that comes into the decision. But this is never simple to figure out. TCO methodologies and parameters can vary extensively, and unless one knows what is excluded as well as included, one cannot determine the value of the TCO, especially as it relates to one's corporate environment and needs. Executives should understand the parameters used in a vendor's TCO analysis and be satisfied it addresses all components that must be considered.

Cloud providers—and some analysts—profess that use of cloud application, infrastructure or platform services (SaaS, IaaS or PaaS, respectively) are the lowest-cost, best solutions for all IT organizations. Other vendors constantly make claims that their products or services provide excellent return on investment (ROI), TCO or other management return metrics. Some claim it without any proof—just a "trust me" statement or a reference to someone's report that use of technology similar to theirs has a great return—while others provide an analysis that demonstrates their ROI or TCO is superior. However, you should not assume the TCO or other analysis is accurate, complete or even relevant to your particular environment. After all, it is reasonable to assume the vendor chose one or more scenarios that put its products in the best light.

 

TCO Methodologies

Whenever someone performs a TCO study, there are two models from which to choose.
• In the static model, the vendor assumes all acquisitions were made at the start of the period and no additional purchases were made during the time period under analysis.
• The dynamic model assumes that systems are not static and growth occurs over the life of the analysis. In the dynamic model, acquisitions are made as appropriate in each year.

The other prime methodology twist is the number of years included in the analysis. The primary choices are three- or five-year periods.
• The shorter three-year cycle is simple in that almost all users keep equipment and software for at least three years and there is no refresh cycle to contend with.
• The five-year cycle is far more complex and can include a number of variable complexities. One issue to address in the five-year cycle is whether to refresh or upgrade the offerings and, if so, at what point in time. The addition of hardware or software refresh or upgrades can drastically change the outcomes.

 

 

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About the author

Cal Braunstein

Mr. Braunstein serves as Chairman/CEO and Executive Director of Research at the Robert Frances Group (RFG). In addition to his corporate role, he helps his clients wrestle with a range of business, management, regulatory, and technology issues. 
He has deep and broad experience in business strategy management, business process management, enterprise systems architecture, financing, mission-critical systems, project and portfolio management, procurement, risk management, sustainability, and vendor management. Cal also chaired a Business Operational Risk Council whose membership consisted of a number of top global financial institutions.

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