by Bill Kirwin

TCO is so 1990s: Say hello to TCS (Total Cost of Services)

Jun 05, 2015
IT Leadership

The market money is in IT services. Are you ready to understand the cost of your services?

EMC Virtustream cloud
Credit: Thinkstock

When IT Total Cost of Ownership (TCO) was first developed in 1987, the world it informed was asset-based, CAPEX-focused and functionally-isolated. The activities and costs associated with that ’87 IT world were known. Today, as enterprises rapidly implement technologies like virtualization, XaaS, various approaches to cloud, BYOD, and mobility delivered by defined, poorly-defined and undefined services, and sourced from various suppliers, new levels of technical and financial abstraction have emerged.

The old TCO approach is of limited scope and inadequate in the 2015 IT world. Starting with a new chart of accounts, a new forensic approach is required to not only analyze but also provide for the monitoring and management of IT finances.

At the IT Financial Management conference in April, I discussed the idea of Total Cost of Services (TCS) as applied to an internal IT provider.  While much has been written about the cost of external services, such as MSPs or XaaS, we want to focus on the internal service provider, which invariably is actually a hybrid service provider. With that in mind, at the IIIE we have refined our definition of IT TCS to be as follows:

“Total Cost of Services refers to full lifecycle cost of the entirety of activities – driven by market forces and directed by policies organized with supporting processes and procedures, as well as any secondary effects – that are performed by an organization or part of an organization to source, plan, provision, operate, control and refresh IT services offered to consumers of those services.”

TCS expands on but keeps the spirit of TCO.  For reference, the official definition of TCO is:

“The holistic view of IT cost across enterprise boundaries over time.”

IT as a defined service was not a part of the vocabulary in the 1980s, though arguably it did exist. For example, my first IT job in 1976 was with a service bureau running a mainframe-based legislative processing system for the state of Connecticut.  It was not only a managed services offering – it was SaaS!

Breaking down the definition of Total Cost of Service (TCS) 

“Full lifecycle cost” means more than cradle to grave. That was a TCO concept, e.g., that ownership has a beginning and an end. Lifecycle cost for TCS means continuous refreshment of the underlying technology, delivery system and price of a service. Our TCS model includes multiple procurement cycles, depending on the expected life of the service and underlying assets. The life of a service is typically going to be much longer than the life of an asset. Services like data back up, security provisioning, hosting and business continuity might not have a definable end, but a lifecycle period of 10 to 15 years might not be unreasonable. 

A purposeful consequence of this type of thinking is that a service requires the long view, while TCO is typically a 3-to-5-year analysis. However, for practical reasons the TCS should be stated on an annualized basis and examined yearly. Some organizations view TCO as being end-to-end cost while TCS is ongoing end-to-end and edge to edge in terms of what it takes to enable the service over an extended period.

“Entirety of activities” means determining the labor and tasks associated with delivering a service.  Labor should be broken down into at least three cost tiers and include consumers, as well as internal employees and external contractors. The number and types of tasks associated with a service will be much broader than those defined in TCO. 

Does anyone remember the “Futz Factor?” In the original TCO model this is a catch all for nonproductive uses of the technology. It is part of a larger category called “End-User Operations.” Same idea for TCS, but with different elements and more broadly defined. As an example, there is the cost of doing “white hat” probes of services linked into the infrastructure on an ongoing basis. A governance structure above the service to monitor possible Denial of Service (DoS) intrusions is a remotely, but essential, cost of any service acquired or provided.

“Driven by market forces” means that the principals of internal market dynamics are in play. These largely mirror the economics of the larger economy for supply, demand and cost, but are in many ways different in the closed system in how they are determined, used and managed. 

An IT shop should not offer a service that is more expensive internally than in the open market on a risk adjusted basis. However, IT should act as the prime contractor for external services, and assure that these services meet corporate governance standards. We are seeing dramatic changes both up and down in the unit costs of platform, support, licensing, management and provisioning required by the service.

“Directed by policies organized with supporting processes and procedures” refers to the delivery and governance framework of a service.  The maturity of these practices is a key differentiator of the cost and ultimate success of a service. The degree of proficiency, level of automation, and positive consumer experience ultimately determines whether the service is viable and who the service provider should be.

A basic tenet of TCO is that the cost is only a numerator and other factors like user satisfaction rating alignment with demand factors are the denominators. So if you have the lowest TCO on the block but the users hate your service, is that a viable strategy? Ask the former proprietors of the “helpless desk” for the answer.

“As well as any secondary effects” was a phrase added by Bruce Rogow, one of our advisory board members. It largely refers to the cost of unintended or unplanned consequences of the policies, supporting processes and procedures. Glitches in data integration, security, compliance, vendor continuity, application or data reclamation and other risk factors that erupt as services are packaged and integrated with other services or back end applications and databases. In the world of SaaS, there may be dozens of changes per week, some of which are benign, others not so.

“That are performed by an organization or part of an organization to source, plan, provision, operate, control and refresh IT services” refers to the lifecycle of services. As mentioned above, services are very different than assets. Delivering a service is a longterm operational, and OPEX-focused cost model. In addition to longterm and continuous delivery of services, this means that IT shops need to rethink the budget process, as well as shift to a consumption-based model.

“Offered to consumers of those services” refers to the new end user. We have long searched for the replacement for this outmoded and arguably derogatory term. IT is meant to be used. IT services are meant to be consumed. Services have a price and a value, supply and demand, and best practices suggest that their consumption should be measured, reported and charged for. Ultimately, this leads to a consumption forecast rather than a supply constrained budget.

Historically, IT capabilities, systems, applications and services were offered in a “directive” manner. They were offered on a must-use, condition of employment basis. So use matched availability. Many new IT services, systems, applications and capabilities today are “elective.” The intended user or consumer may choose to use or not use the service to the degree they wish and in the manner they wish. Elective IT has profound implications on TCS and the actual material benefit achieved.

IT services are today, or ultimately will be, delivered in an open and competitive marketplace in most enterprises. Internal IT service providers have been challenged to price their offerings because they have not been able to assess their underlying costs. This is an extreme disadvantage in a market where the commercial service providers are very aware of their TCS.

The industry needs a common cost platform that will enable IT to measure its cost of service. For 30 years, TCO has been a useful metric to understand the cost of the old IT world. That world is over, done, fini, kaput. That is why TCS is the new TCO.