TCO (Total Cost of Ownership)

This page describes TCO (Total Cost of Ownership) to get VFM (Value For Money).

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Overview: What is TCO?

First of all, TCO is important. A ZDNet Tech Update article named TCO among the 7 biggest IT concerns for 2002 — “the driving forces behind IT strategy for 2002--and the remainder of this decade. These are the underlying themes that will cut across all of your major initiatives. They are: vertical integration, mobility, open standards, total cost of ownership (TCO), availability, scalability, and security.”

According to TCO is a calculation intended to arrive at, all things considered, the total effective cost of a purchase.

TCO overlays two aspects: the major categories of cost spent over several phases during the life of the product/project under consideration. For example, one strategy to lower TCO — Automated Self Diagnosis and Recovery — can reduce costs (support time devoted to downtime incidents) and maintain benefits (avoid loss of user productivity or reduce risk of financial loss).

Eric Stegman at the Gartner Group originated the term TCO Analysis, a methodology to define all the ramifications of a major strategic decision such as a commitment toward a certain tele- and data-communications or Information Technology (IT) infrastructure. Typically, a TCO Assessment uncovers hidden costs to arrive at the fully burdened costs.

TCO helps to avoid "apples vs. oranges" comparisons among alternatives competing for the same limited budget dollars. For example, is buying a used ink-jet printer really “cheaper” than buying a new brand-name laser when the cost of repair and cost of ink cartridges for various expected volume of work?

TCO should consider calculable financial numbers such as Return on Investment (ROI), NPV, IRR, and Payback Period, TCO should also consider difficult-to-measure intangibles such as customer satisfaction, increased knowledge, and the organization's agility to compete.

The TCO has to be compared to the Total Benefits of Ownership (TBO) to determine the true viability of a purchase.

Technology by itself doesn't do anything; value is achieved when technology is utilized as a strategic tool to support business objectives. The ultimate net result of decisions should not just provide a financial advantage, but improve the overall well-being of the organization and its constituents over the long term.

one company's offer to perform a TCO Analysis includes:

• Analyze network operations to identify and quantify fixed, variable and hidden/opportunity costs. Create accurate, concise chart of IT system to allow faster, cheaper evaluation of current operation costs and future changes.
• Consult with client to prepare business growth models to forecast future upgrade, maintenance and migration costs.
• Provide prerequisite network inventory/charting for OS migration/upgrade planning & evaluation.
• Total MIS budget analysis, forecasting, and assessment.
• Measure benefits of new IT infrastructure investment.

Categories over LifeCycle Costs

Here are some major categories of cost (including all products and services):
1. Training / Professional Development
2. Software
3. Hardware Replacement, Retrofitting
4. Connectivity (Cables, Hubs, etc.)
5. (Technical) Support (and Policy Enforcement)
6. Administration and (Change) Management

"Downtime" and other "Cost of Quality" costs reflect opportunity costs of non-perfect quality.

In each organization these categories may be combined or renamed to reflect differences in the division of budgetary authority or how vendors organize their business expertise.

Costs in each of these categories are spent over these major lifecycle phases:

1. Pre-purchase Needs Assessment and Planning/Strategizing
2. Vendor Evaluation, Financing, Purchase / Procurement / Acquisition
3. Installation/Retrofitting/Setup/Configuration/Integration/Validation
4. Early-Life Usage/Break-in/Deployment Testing
5. Mid-Life Refurbishment/Upgrading/Adaptation
6. End-of-Life Usage/Refresh/Migration/Phase-out/Retirement/Replacement/Disposal



Up-front expenses are just one part of information system costs.

Tradeoffs

A key part of a TCO analysis is determining the wisdom of a tradeoff between categories of cost (such as more training to reduce support costs) or timing of costs (such as more planning and training to reduce deployment blunders).

One example is when making the decision whether to deploy ($1,800-$2,200) notebook computers solely because desktop machines ($600-$800) are lower-priced, organizations should consider the bottom line value of productivity and responsiveness made possible by the enhanced mobility of workers using notebooks. Also consider lost opportunity costs and worker expectations. The August 12, 2002 article by Jack Gold of the Meta Group explains: “Indeed, if we are to assume that an average knowledge worker is paid $100-$120/hour, then as little as 20 extra productive hours of work per year due to notebook availability will more than offset the additional TCO, which includes both the acquisition and ongoing support costs.”

TCO Reduction

Compaq identified twelve specific best practices addressed along with the degree of implementation: Technology Improvement, Process Improvement, and People Management:
1. Asset Management
2. Server Based Client Image Control
3. User State (Fault) Management & Restore
4. Systems (Remote) Management
5. Managed PCs
6. Automated Software Distribution
7. Scalability (Resource Utilization Monitoring and Performance Management)
8. Business Protection
9. Service Desk (Well Defined Escalation Process)
10. User Management
11. Standardization
12. People Improvement

Strategies to lower TCO:

1. Simplify by Standardization - maintainability, reduce need for training
2. Manageability:
   • System Configuration and Integration for reduced setup costs
   • Remote Administration for reduced labor costs and travel time
   • Automated Self Diagnosis and Recovery for decline in downtime incidents and maintenance of user productivity
3. Business Protection (Proactive and Responsive)
4. Lifecycle Management (Availability Review)

Macromation, Inc. offers a TCO Benchmarking service.

Dell's TCO page

Compaq's TCO site

Microsoft's 181 page August, 1999 Arthur Andersen study they commissioned on the Return on Investment (ROI) of upgrading to Windows 2000 Microsoft's Zero Administration initiative for Windows is the company's plan for minimizing ongoing expenses associated with the upkeep of Windows networks.

$25 Windows 2000 Reducing TCO Little Black Book: A Guide to Maximizing Benefits of the TCO Feature by Robert E. Simanski. Feb. 2002

Training / Professional Development

What training is necessary to ensure to obtain expected benefits from hardware and software purchases? (Avoid "shelfware")

There are several groups of people impacted by a technological implementation. Ideally, each of these stakeholder populations would obtain training focused on their needs:

• End Users (such as administrative staff or students in a classroom)
• Supervisors of users (or teachers in a classroom).
• Administrators concerned about payback from the technological investments.

According to Edweek (http://www.edweek.org/sreports/tc98/) The U.S. Department of Education has recommended that school districts set aside 30 percent of their technology budgets for staff training and development. Today many state departments of education require that districts devote between 20 and 30 percent of their state technology grant money to staff development.

Although an organization may reduce training to look good on paper, the lack of skill in operating technologies has high hidden costs in time taken from "real" work for casual learning and self support. This approach may end up costing more than a thorough formal introduction by a professional instructor.

The most talented workers may be socially forced to doing low-value peer support rather than focusing on higher impact planning work.

The Consortium for School Networking (CoSN) offers workshops to train teachers on applying TCO to classroom technology.

Professional Development

Software

Enterprise Infrastructure and Network Management (such as IBM Tivoli, HP OpenView, and Microsoft System Management Server, BizTalk, etc.)

Enterprise Applications (SAP, Baan, JD Edwards, Oracle 9i, Peoplesoft, etc.)

Server Applications (Oracle 7/8, Microsoft SQL, BizTalk, Intrusion Detection, Email filtering, etc.)

Desktop Applications (Microsoft Office suite, AutoCAD, AntiVirus, etc.)

Hardware

Categories of hardware include:
• Networking Equipment and software:
  • Wiring and raceways
  • Server machines (to server web applications, databases, data warehousing, control load balancing, manage licenses, etc.)
  • Client machines (for users, administrators, testers, etc.)
  • System software (Windows/Sun Solaris OS)
  • Routers/Switches
  • Dial-in WAN modems
  • Data storage (SAN)
  • Network traffic generators

  Purchases can be lease payments amortized over several years or expenses in the period when they were purchased.

• Building modifications:
  • HVAC
  • Electrical wiring
  • Wiring racks in closets
  • Outlets
  • Power Circuit breakers

• Other

  Estimates for the price of hardware should reflect both expected reductions as models become commodity, but also reflect higher prices for new technologies.

  Due to the rapid rate of technology, it may no longer be prudent to assume a traditional useful life for 20 years for wiring, racks, and electrical closets in light of advances in wireless computing.

  A solution such as (WiFi) with wireless NICs communicating to a RF hub can have a lower total cost than copper wiring.

Utilities and Connectivity

• Network access: Centrex, ATM, T-1, Long Distance, etc.

• Space usage:
  • Server rooms
  • Lab rooms
  • Classrooms
  • Media centers
  • Wiring closets
  • Furniture
  • HVAC
  • Asbestos/mold removal
  • Security

• Other:
  • Call center

K-12 TCO Calculator calculates the percentage change per year based on estimates for 5 years. Costs are different for each types of machine (servers, desktop, integrated, notebook, and thin-client computers). Different costs are also assigned for how machines are utilized (application servers, thin-client servers, data storage servers, etc.).

Gartner Group TCO Manager tool

Support

Sometimes the decision is made to shift older machines to simpler uses. But such a decision could result in higher support and maintenance costs.

What is the true cost of professionals and executives fixing their own machines?

There are costs to properly disposing obsolete machines.

A survey conducted by Compaq of hundreds of financial executives and IT managers responsible for IT decisions reveals that only one out of every twenty-five financial decision-makers realized that costs incurred after initial deployment comprise the largest component of IT cost.

Costs incurred after the initial deployment can comprise up to 80 percent of IT cost, yet many decision-makers focus on controlling IT capital costs rather than the post-deployment cost. Understanding where IT costs are incurred is a first step in developing the necessary awareness of total cost of ownership (TCO) including its importance and the potential benefits.

Web Services Availability

Admin

Perhaps the most heart-searching aspect of TCO are estimates for future administrative costs.

TCO requires clarification of assumptions. Discussion of the numbers to put down require reflection of the role of management and the style of management as additional technologies are introduced. Is a reduction in administrative "overhead" costs one of the benefits of technology? If so, does it change the roles, responsibilities, and authority of current managers? Do these assumptions create an adversarial situation for current administrators because they are working towards eliminating their own jobs?

Thinking Outside the Box

“Expect the unexpected”

Consider ethical, ecological, and political ramifications of decisions and actions.

Consider the impact of decisions and actions to the broader organization, corporation, local, state, regional, national, and international communities.

Uncomming Thinking for Crazy Times by Irving Mitroff describes what might happen when broader issues are not examined and presents some examples of successful thinking.