Digital Technology and the Importance of the Total Cost of Ownership
Digital Technology organizations are recognized as business enablers and an effective Total Cost of Ownership process is one of the critical tools they should bring to a business. Digital Technology professionals who understand and can articulate the complete business impact of technology products or services become indispensable strategic partners and are sought after by management boards. Revenue growth and increased profits are the two most essential parameters that determine the value of the company. In the digital economy, information technology is the vehicle that drives both. To improve company profitability, it is imperative to have a full understanding of all underlying costs and a plan for minimizing cost, driving revenue and maximizing asset utilization. A vital tool to assess financial impact is the Total Cost of Ownership (TCO) analysis.
Why TCO? Because it enforces a discipline for articulating business benefits and impacts in common financial terms. TCO analysis should be used for every digital technology initiative. The more complex the initiative is, the more important this analysis is. Some examples include:
- Selecting which initiatives to include in next year’s budget and the company’s strategic plan
- Identifying which cloud solution is the best choice
- ERP systems that have the lowest TCO
- Comparing multiple options for customer facing systems
- Understanding the current state systems versus future state systems
- Business Transformations
The biggest advantage of a TCO analysis is that it identifies both apparent and hidden costs over the expected life of the project. The following are some examples of cost contributors which may appear as a hidden or apparent cost depending on the activities they are associated with. A well-designed Total Cost of Ownership process will include the analysis of things such as:
- Hardware and software licenses, maintenance contracts, variable capacity and peak demand time costs
- Network, telecom, backup systems, data centers and mobile device costs
- Bandwidth and scalability
- Changes in facilities requirements such as floor space, heating, cooling, power and physical security
- Business continuity and disaster recovery costs
- Support personnel (employee, vendor, contractor) required to deploy and operate IT systems and infrastructure
- Initial and ongoing training costs for company personnel – these are often essential to the success of a project and are the biggest examples of hidden costs
- Cost of upgrades and service contracts
- Migration from one system to another
- Cyber-security requirements
- Regulatory compliance costs, such as those for privacy or environmental laws which vary according to industry and geography
- Lease vs. Buy
You get the picture: there are a large number of cost contributors to consider and it is critically important that companies create a Total Cost of Ownership process that is utilized for all digital technology initiatives. If done properly, an effective TCO process will make strategic decisions easier and minimize downstream cost surprises.
Total Cost of Ownership Processes should be developed to comply with a company’s needs. We find that most middle market company leadership teams do not have a process and that their employees (Information Technology, finance, purchasing, etc.) are not trained in the concept of Total Cost of Ownership. Group50’s Digital Technology Practice has developed Total Cost of Ownership methodologies, assessments and training programs designed to create and implement a TCO discipline in a company.
If you would like to enhance your Business-IT partnership with a strong Total Cost of Ownership competency, or have an immediate need that our team of technology, finance, and strategy experts can help with please send an email at firstname.lastname@example.org. You may also contact the head of our Digital Technology Practice, Shirish Néné at email@example.com or call him at 703-201-3936.
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