TCO: Flawed but useful

With cost pressures being applied to every corner of corporations these days, the use of total cost of ownership (TCO) as a financial metric is undergoing something of a rebirth. IT managers are being asked by top brass to prove that their shops are low-cost, best-in-class providers when it comes to acquiring, deploying and managing everything from Palm devices to mainframes.

But critics are quick to point out flaws with the TCO model—especially for IT and business leaders looking to measure value. The concept of TCO, originally developed in 1986 by Gartner Inc. for PCs, has evolved to embrace all facets of distributed computing, including software, servers and mainframes.

TCO, which includes the total costs to acquire, maintain, upgrade and dispose of a piece of computing equipment over its lifetime, "has no way to measure or maximize benefits, only to reduce costs," says Chip Gliedman, a Norwalk, Conn.-based analyst at Giga Information Group Inc.

Gliedman and other analysts have more nits to pick with TCO analysis. For example, it's frequently used to benchmark the costs of managing a vendor's application or piece of hardware against the costs for industry rivals' products, which isn't always an apples-to-apples comparison. And a product can have a low cost of ownership but not be the best managed.

"You could have very low-cost desktops that break all the time" and consequently drive up a company's help desk, maintenance and replacement costs, all of which are part of TCO, notes John Jordan, a principal at Cap Gemini Ernst & Young in Cambridge, Mass.

"When I talk to people on this topic, I'll ask them whether they would go with the heart surgeon with the lowest cost or the best track record," says Ian Campbell, president of Wellesley, Mass.-based Nucleus Research Inc.

A frequently lobbed criticism about TCO is that the methodology isn't comprehensive enough and typically fails to include soft, or hidden, costs such as the training required when new users are added to a system.

Even Bill Kirwin, the so-called father of TCO, acknowledges that the model isn't flawless. "I'm aware of those that have said that the model is flawed, and I'm the first to admit that the model isn't perfect," says Kirwin, a Gartner analyst. "But we've evolved the model over the past 15 years, and it keeps getting better all the time."

For instance, Stamford, Conn.-based Gartner has added a "complexity index" that factors the complexity of the business environment being supported into the technology ownership costs, says Kirwin. "So if you're a Wall Street brokerage, spending $15,000 a year per seat to keep those stations operating and the traders happy might be acceptable," given the enormous profits that stock traders can generate for a firm, says Kirwin. "But if you're supporting clerical workers in Houston, $15,000 per seat probably wouldn't be acceptable."

Other Hidden Costs

TCO analysis also typically fails to include the hidden cost of "casual maintenance," such as the amount of time workers spend helping one another troubleshoot PC problems. And "people underestimate the cost of building something and underestimate how long it will stick around to haunt them," says Alistair Davidson, a managing partner at Eclicktick Corp., a Palo Alto, Calif.-based consultancy.

Cost-centric metrics such as TCO also "position IT squarely as a cost center, and that's not a good place to be," adds Gliedman.

So, why should companies use TCO? One reason, say some practitioners and analysts, is to placate the demands of CEOs and other top executives who want quantifiable proof that their organizations' IT activities are being run as efficiently as possible. This is particularly relevant as a growing number of corporate chiefs are weighing the potential cost savings of outsourcing IT activities to third-party service providers like IBM and Electronic Data Systems Corp.

Another reason for conducting TCO analyses, say many consultants and practitioners, is to include those figures in other calculations that are more capable of illustrating the business benefits IT investments can deliver.

"TCO needs to link to ROI," says Stephen J. Andriole, a professor of business technology at Villanova University in Villanova, Pa., and a senior consultant at Arlington, Mass.-based Cutter Consortium. On its own, says Andriole, TCO doesn't answer questions like what contributions those devices are making to a company's top and bottom lines.

"We do find [TCO] useful, but it is [merely] one point of reference," says Margie Farber, senior vice president of business area services at government-backed mortgage company Freddie Mac in McLean, Va.

"We do TCO on all of our projects," says Malcolm Fields, CIO at Muscatine, Iowa-based office furniture manufacturer HON Industries Inc. "We don't care so much about the buy-in costs, but how much it's going to cost us over the long term" for those projects.

It's also important to consider ancillary costs when developing TCO analyses, such as the impact that the addition of a transaction-intensive application might have on network traffic and downstream networking costs, says Howard Pigee Jr., director of IT and CIO at Corning Life Sciences, an Acton, Mass.-based division of Corning Inc.

The bottom line: Performing a true TCO analysis means fitting together lots of cost pieces, many of which can be scattered well beyond IT. The trick is finding and including them all.

The Obvious Costs


Packaged-software license fees


Hardware and software deployment

Support and service

Custom application development


Energy and space

Some Not-So-Obvious Soft Costs

System downtime in terms of lost opportunities and productivity

Being locked into a technology

Changing technologies and platforms

Having nonstandard configurations

Training new users


Copyright © 2002 IDG Communications, Inc.

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