Avoiding the TCO Trap

Avoiding the TCO Trap

Using the total cost of ownership metric is a good way to measure costs but a bad way to analyze the full business value of IT investments

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 practised 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 life cycle 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 f inance 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.

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