by Jack Keen

TCO Can’t Measure All of IT’s Value

Mar 01, 20046 mins

Great contributions to civilization inevitably bring great capacity for misuse. The highly popular management concept of TCO, or total cost of ownership, is no exception. TCO is a good way to measure systems costs?but not overall business value. Unfortunately, too many shops willingly allow TCO to substitute for a solid business value analysis as input into IT investment prioritization decisions. Any chance your shop is unintentionally throwing these decision-making curveballs? Let’s take a closer look at the real nature of TCO and the role it should play in IT selection decisions.

On the surface, total cost of ownership is a great analysis tool, a relatively straightforward and easy way to understand and approach getting a better handle on the true IT costs of competing IT investments. But beneath TCO’s veneer of financial respectability lies a process that is easily abused. Not because the concept of TCO is fundamentally flawed. The problem is that TCO has become so popular that its cost-oriented analysis is becoming a substitute for the more relevant (but more analytically challenging) full value analysis. The latter concept is crucial if proposed technology investments are to be correctly assessed and prioritized.

TCO is just one slice of the value pie because TCO addresses only one of several building blocks that make up what I call Full Business Value (FBV). Full Business Value, essentially the entire worth inherent in a business investment, has four components: systems efficiency, systems effectiveness, business efficiency and business effectiveness. TCO’s focus, as practiced by most people today, is primarily one of systems efficiency. That means TCO is only one-fourth of the complete value story.

TCO has become popular because it cleverly flushes out valid IT-related costs that have been overlooked for decades. For example, according to Gartner, the lifetime cost of a PC can be more than five times its acquisition cost. This eye-opening assertion is based on a thorough consideration of the complete cost of not only obtaining the PC but operating, supporting and maintaining it during its lifetime. As this important concept took hold, project sponsors and business case creators who used TCO to assess lifecycle costs were heaped with praise. Finance directors, especially, were pleased that TCO identified these outlays, in clear and easily measurable terms. TCO momentum grew as commentators sacrificed acres of trees, tons of ink and billions of pixels supporting TCO’s seductive appeal. Rather than accepting the challenge of assessing harder-to-measure and more controversial types of benefits?such as higher quality processes, faster time-to-market, more satisfied customers and happier employees?many finance and IT managers locked into a tight TCO embrace and began to apply TCO as the complete justification for IT investments.

But here’s an example of how TCO can uncover important benefits yet fall short in describing total value. Suppose we feel compelled to justify a server and network upgrade, in the face of heavy pressure for IT to reduce?rather than expand?equipment outlays. Using TCO’s “systems efficiency” focus, we capture all lifetime costs related to acquisition, installation, operation, support and maintenance of the server and network upgrade option. Thus, if investment option A (status quo) costs virtually nothing to acquire (it’s already in place), but costs more to use on a daily basis than option B (upgraded servers and networks), our analysis will capture and quantify these factors. Similarly, TCO will capture such items as cost and risk of downtime as well as the maintenance and support costs. So far, so good. We now have a defensible cost analysis.

But what is the total business value of our upgrade to the company? To find out, we need to add three non-TCO components of Full Business Value to our analysis. For the “systems effectiveness” component, we could quantify factors such as the ability to bring on entirely new applications, such as CRM, because the new servers and networks would have the needed functionality and capacity. For the “business efficiency” aspect of value, we might include the value of our reduced sales-force travel costs because of better, faster data from the advanced CRM solution made possible by an improved server and network infrastructure. For the fourth component, “business effectiveness,” we could examine the tangible and intangible value of having a sales force capable of introducing more new products faster, again because of the capabilities of this advanced CRM system.

By using Full Business Value?not just TCO?to justify IT investments, you may not only uncover additional benefits that make the business case, but you may also boost IT’s enterprise credibility by showing the non-IT executives that IT fully understands the scope of the company’s operations.

If you suspect that TCO may be misused in your organization, here are three suggestions that can help you get the value analysis right.

1 Detect.

Be alert to signs that you are too dependent on TCO for analysis. Warnings include: TCO is more than 25 percent of any value analysis and business case effort; TCO talk (rather than business value talk) dominates value analysis discussions; the terms TCO and ROI are used interchangeably; revenue-side benefits and intangibles are not used in business case justifications.

2 Recruit.

If you feel a TCO-focus problem may exist, search out executive peers and other key influencers to gain their support for an enterprisewide value-culture upgrade. Ask for their help in convincing guardians of the investment decision-making process that while TCO plays an important role, there is much more required. Remind those who hesitate that visible, defensible and solid enterprise investment decision-making is a foundation of good IT and corporate governance (for example, Sarbanes-Oxley), Six Sigma quality processes and related initiatives.

3 Embed.

Once you have political support for this value analysis makeover, establish and embed the FBV view within your company’s IT investment decision-making processes. Help your IT selection committee insert these FBV explanations in their requirements for business case input. Develop business case templates, complete with clear documentation that visibly request such input, and explain how to find it. Establish value analysis training, complete with lots of examples of good and bad practices. Lastly, publicize early successes and look for ways to fine-tune the process as it goes forward.

TCO can uncover important benefits?but not total value. As with any good idea that has the potential to run amuck, taking the time to use TCO appropriately is a key step to success.