TCO versus ROI

Devising ways to show the value of corporate technology has occupied CIOs for about as long as the 25-odd years the profession has existed. While measures such as internal rate of return and economic value added are applied with mixed success, ROI and TCO remain stalwarts.

An ROI calculation quantifies both the costs and the expected benefits of a specific project over a specific timeframe, usually three to five years. TCO, on the other hand, includes just costs.

"When you think TCO you don't see IT as a business driver or an asset that can increase revenue, profit or customer value," says Anthony Giannino, a consultant at Cornerstone Solutions, a value-added reseller in Chicago. Giannino was CIO at pharmaceutical distributor Alliance Wholesale from 2002 to 2007.

In an online survey of 225 technology managers, 59 percent said that ROI influenced whether they pursued a project in the past 12 months, compared to 41 percent who reported TCO justified the decision. In the coming 12 months, the relative difference in importance between the two measurements is more pronounced: 62 percent of respondents favoured ROI compared to TCO's 38 percent.

"ROI has to be the answer. TCO only looks at one side of the equation," says Wayne Sadin, CIO at Loomis USA and a survey respondent who chose ROI.

TCO, Sadin says, works well for must-do infrastructure projects, such as upgrading an e-mail system. An IT leader might present options to other senior managers that compare the cost of adding one e-mail feature or another. But e-mail doesn't typically uncover new sources of revenue or other topline growth opportunities that ROI can measure, he says.

Ken Harris, CIO at Shaklee Corp., agrees. He chose ROI in the survey, too. Although TCO has a place, extensive use of ROI signals how sophisticated a company is about IT's strategic importance, Shaklee says. "There has been for awhile a shift going on toward more IT projects that impact topline than that are just focused on cost savings," he says. Harris has also been a CIO at Gap Inc, Nike and Pepsico

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