Know Your IT Total Cost Of Ownership And Its ROI

Another methodology consideration is lease versus purchase. This complicates the analysis, especially because most leases are for three or four years and most purchases assume at least a five-year productive lifecycle. For the purchase analysis, some vendors lock in the expenses in the first year, while others prorate the financing over the five-year period. Many CFOs want to see the tax implications in the model, while most TCO models do not address taxes or the real cost of capital for an organization.

The last variation is the competitive solution. In many cases, the vendor compares its current offering against an older-generation solution that would typically be installed in customer sites. This is valuable to show why one should upgrade, but it does not demonstrate that the vendor’s solution offers the best alternative of today’s products. Thus, a comparison of current solutions—the vendor against its competitor—can be another valuable data point to discuss with the seller.

 

 

TCO Parameters

Rarely do TCO studies address all of the ecosystem costs. If a vendor is selling servers or storage, the TCO usually is focused on that particular infrastructure component and not the full ecosystem it impacts. A good study will also include the associated software, administrative, maintenance, power and facilities expenses. Studies frequently only look at the production system. However, if the development and test systems are included, the results could shift significantly, as would the cost of migration and dual solution overlap.
Within each of the parameters stated above is a number of variables that apply. For example, labor costs vary significantly by area, skill and time, while power consumption varies by hardware configuration and rates float by area, time and category of user.

 

 

A Starting Point

With all the variability in TCO studies and the fact that they rarely map well into one’s current environment, what good are they? If it is a good analysis, it will provide insight into what elements need to be considered at a minimum and how the vendor believes its solution best plays in that area. Moreover, most good studies can be extrapolated to other scenarios. IT executives need to do that and validate that this logic works. They should also parse the study to find out what methodology and parameters are excluded, and should discuss with the vendor what those impacts would be for them. A TCO report is an excellent starting point for an IT executive to get his or her arms around a vendor’s offering and can facilitate a dialog on all the business aspects of a vendor’s solution.

Other articles by Cal:
A Walk in the Cloud
Small Business Can Get High Availability From IT
Leasing Contracts: Not All Are Equal
15 Reasons it Makes Sense for IT to Lease

Cal Braunstein is lead analyst at Robert Frances Group, which provides advisory, consulting and research services to senior executives in IT and LOB management as well as for marketing/sales management for companies that provide IT and communications services and products.