Total cost of ownership once provided me with a useful means of
forecasting my department's budgeting. But its failure to take into
account the changing technologies - wireless cards and access,
personal firewalls, bigger applications - means I can no longer
trust it. What other means of extrapolating future budgetary
requirements does the panel recommend?
Put your faith in benchmarking
Apractical solution to
combat the inability of total cost of ownership (TCO) to encompass
newer technologies is to benchmark your IT components' cost and
performance with other early-adopter organisations. Provided this
is supported with "behind-the-results" discussion with
participating organisations to collectively examine variations, you
can identify areas for improvement, compare current costs and
collectively extrapolate for budgeting purposes.
Although these are fast-changing times, benchmarking is evolving to
accommodate organisations' needs for low-cost, three-month-cycle
comparisons. To understand the TCO of a current technology, its
cost needs to be looked at in the context of where it is being used
- organisation, business structures, IT architecture, support
provision, hardware and software lifecycles, licensing requirements
and end-user requirements.
For budgetary purposes, it is equally important that your
relationship with business decision-makers makes you aware of
planned business directions and organisational changes that will
affect what you use and how you use it.
New technologies are harder to cost. Many large organisations will
be piloting newer technologies in discrete applications where
experiences and costs are accurately assessed. The advantage of
discussing initiatives, methods, processes and likely and actual
costs directly with other organisations through a modern responsive
benchmarking method will give you valuable indicators based on
current corporate user experience.
How similar or different the other organisations are is
comparatively unimportant; by understanding the similarities or
differences, your own budget forecast figures can be adjusted
accordingly.
David Roberts, Tif
Risk/reward profiling can help
As a tool, TCO is useful
for evaluating different options, particularly when applied to a
proven technology. Large companies have justified group standards
for PCs by calculating that higher support costs offset lower
purchase costs.
For new technologies, relative ownership costs may be radically
different owing to the "failure" costs of backing the wrong
standard. Take the case of large application packages, notably
enterprise resource planning (ERP) systems. Companies buy an ERP
package in the expectation that the supplier will maintain and
upgrade it. Choose the wrong supplier and that investment will not
be sustained. Developing a bespoke package leads to unpredictable
maintenance costs. Subsequent ERP purchasers benefit from more data
to assist both ownership cost estimates and the supplier
selection.
Is it best then to delay new technology investments? There is a
risk/reward relationship with being an early adopter and no
decision may generate a higher risk. Rewards and risks can be
mapped to help budget both the total and individual amounts
allocated to new technologies. Rewards link to the competitive
contribution from improved processes. Internal and external risks
include skill shortages, service failures and changing standards.
Thus the recommendation is to supplement TCO for proven technology
by budgeting initial investments in new technologies using a
risk/reward profile. To estimate ongoing operating costs, companies
should apply industry research and personal experience with similar
technologies.
Sharm Manwani, Henley Management College
Consider the value of IT, not the cost
From what you have said, it seems that there are two possible
reasons for the difficulties you are experiencing with TCO:
- You may be having difficulties with the calculation itself
rather than the principle of TCO. When applied correctly, these
calculations should allow you to predict the cost of individual
investments over a five- to seven-year period.
If TCO calculations are inaccurate, you may suffer from runaway
costs. One way to protect yourself in this circumstance is to
consider assigning cost risk to your suppliers. To achieve this may
mean suppliers helping you with the TCO calculation, since they
will want to quantify the risks they face.
- In many organisations, IT is viewed as a cost which should be
minimised rather than an investment that should be maximised. For
this reason, many IT departments have firm budgets where costs and
other inputs are controlled to keep within the allowed amount.
The prime factor in approving IT investments should be the value to
the business, rather than the cost of the investment. So, where IT
investments result in demonstrable business value, funding should
be passed through from benefiting business units to the IT
department to pay for the technology investment. Under this regime,
the IT department's budget will flex to reflect the business value
of the IT investments.
Roger Rawlinson, NCC Global
Ditch technology-centred approach
The best place to
start is with your company's own finance experts. The way you
provision for the future costs of IT must follow the company's
wider financial policies. Your finance colleagues should be able to
tell you what these policies are and help you implement them.
Unless your company sees a need to treat IT spending as a special
case, you should use the same approach for IT budgeting and
investment planning as other long-term commitments, for example,
buildings, plant and manufacturing equipment.
In some cases, this may be a new question for the finance people,
in which case you have a great opportunity to collaborate with them
on something that is of real strategic significance. These days,
the way your company plans and manages IT investments is more
important to a successful IT strategy than the more traditional,
technology-centred approach.
The relentless evolution of IT that you describe in your question
is one reason for this. The other is the fundamental changes that
are occurring in the IT supply market: namely, the shift in the
balance of power away from suppliers and towards customers, the
development of a more service-based model, major changes in
suppliers' pricing strategies, and so on.
All of this uncertainty means that your IT budgets and investment
plans cannot be driven by the way the IT market has worked in the
past, or works today. Instead, they need to be driven by the value
that your company thinks it can create from IT, and how much you
are prepared to pay, in total, for that value.
Chris Potts, Dominic Barrow