When Cheap Is Expensive

My dad used to say, "Cheap can be expensive." He wasn't a wealthy man, but he believed in buying quality goods because, over time, they often proved to be more economical than low-cost substitutes. To put it another way: When you go for short-term savings, you often increase long-term costs. Sometimes we buy lower-cost goods because of

a shortage of cash. If you have only $10,000 to spend on a car, you aren't going to get the Mercedes. However, short-term investment decisions aren't just a result of a lack of cash. Managers make short-term investment decisions for many reasons. Sometimes they're trying to meet short-term objectives, such as improving their quarterly profits, which seems to be a more urgent goal than investing for the long term. Besides, two years from now, they may be long gone and the health of the firm will be somebody else's problem.

Shortsighted IT decisions are a particularly big problem because the consequences are inherently long term. For example, a company may buy "cheaper" PCs to save money in the short term. However, since those PCs have a life cycle of about three years, the company will be forced to live with the consequences of its decision for that long. The consequences of short-term thinking are even more dramatic when we consider that many applications have a life cycle of 10 years or more.

There are two areas in particular where short-term thinking regarding IT is going to sting many organizations in the coming years:

? Underinvesting in IT. Companies have been squeezing IT budgets for a few years, and in many cases, that was a necessity. While IT budget cuts may be needed, companies have to maintain some balance between cost reduction and long-term investment. Many of the IT managers I talked to during the past year were asked to make extraordinary cuts in their IT budgets. These reductions were so deep that they now need significant upgrades to their IT infrastructures and have a backlog of application development needs that they won't be able to address in the foreseeable future.

For example, many companies are still running core systems on old technology that really should be replaced. However, because of the lack of ongoing investment in IT infrastructure, many companies are finding that the infrastructure upgrades required to launch new enterprise initiatives make the efforts cost-prohibitive.

Offshore outsourcing. It probably cuts costs in the short term, but not necessarily in the long term. Sending IT work offshore can be economical, but too many firms are rushing into these arrangements because they're now in vogue. Considering only hourly labor rates isn't a sufficient analysis to determine whether offshore is the way to go. IT managers must also consider communication and collaboration issues and their resulting costs, as well as risks. In many organizations, unfortunately, the decision to send IT work offshore turns into the proverbial "religious war," with IT managers taking a defensive and protective posture. This is certainly understandable, but it often fails to get the important issues on the table.

So, how do you get other executives to view IT investments in a long-term fashion? The most effective way, I'm afraid, it to provide the numbers that will show them costs over the long term. This exercise may mean providing a five-year view and performing a total-cost-of-ownership analysis on the product or service at hand.

Take the "cheaper PC" example. If an IT manager wants to demonstrate that the long-term cost of owning these PCs is actually more than it is for the more expensive units, the argument might go something like this: He could point out that the acquisition cost of the hardware is only a fraction of the fully loaded five-year costs, and then he could estimate the enormous amount of time that staffers will spend fixing the machines and ordering replacement parts to show that there are no real cost savings.

Often, IT managers are too busy or simply unwilling to put the time into doing these analyses. However, if we want our business counterparts to start thinking about the long-term implications of IT decisions made today, we have to move beyond tactical, day-to-day concerns ourselves.

Barbara Gomolski, a former Computerworld reporter, is a vice president at Gartner Inc., where she focuses on IT financial management. Contact her at barbgomolski@yahoo.com.

Copyright © 2004 IDG Communications, Inc.

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