TCO Studies Miss Basic IncompatiblitiesAug 29, 2005, 23:30 (3 Talkback[s])
(Other stories by Brandioch Conner)
By Brandioch Conner
Once again the "Total Cost of Ownership" (TCO) "debate" rages. The only problem being that no one agrees on the measurements or even what is to be measured. So why not one more useless opinion?
First off, TCO is fairly well understood when it is applied to cars. No, really, this isn't another car analogy. TCO (sometimes reffered to as "True Cost of Ownership") is easy to find for cars and not many people argue about it. For cars, it includes everything from the initial price, the repairs over five years, all the way to how much you can sell it for after those five years. The good news is that it is easy to measure and compare between the various makes/models.
The problem with the various "TCO studies" regarding IT systems out there is that they neglect certain basic facts. The TCO between two systems is only comparable if:
Suppose Company A (100 employees) has 90 of their employees (each with a laptop) as salespeople on the road (with 10 people and workstations spread between 3 regional offices), dialing in or using wireless/hotel DSL and running off-the-shelf contact management software.
But Company B (100 employees) has 100 of their employees working at one site, doing data entry on an in-house built database.
Any comparison between the two would be useless. But that's just what most of the TCO "studies" seem to aim for. Not only that, but they miss the really important aspect of this discussion: TCO does not, by itself, mean anything. It is only useful when you also consider the "migration costs" and Return on Investment (ROI). So, here are my definitions for these items.
TCO: Licensing costs and recurring costs such as electricity, patching, salaries, office rent, annual training, etc. If done correctly, this should not change from year to year (adjusted for inflation). I believe that is the most important point. If the numbers are changing then the calculation is useless.
Migration costs: This is the cost of getting from where you are right now, to the other system. Migration costs are paid once while the TCO costs are paid year after year. The licensing costs go under TCO instead of here because they are part of the system.
ROI: Basically, how much money you make from using the system. It doesn't matter if there is a low TCO and low migration cost if you aren't making/saving more money with the system than without it. If you're arguing over TCO, that means that you've already conceded that both systems make money. All you're arguing over is whether one makes money faster than the other.
The important calculation here is: (X years) * (ROI - TCO) = migration costs.
How soon will the system pay for the migration so you can start seeing a profit from it? After that, it's all $(ROI - TCO) as profit.
Now, the TCO difference would have to be very large before that equation would start to be persuasive. Saving 10% a year is nice, but it depends upon how many years you'd have to spend before you actually saw those savings. So it seems to me that the real issue would be the migration costs. And high migration costs usually mean "vendor lock-in." It isn't the new system that costs more, it's getting rid of the old proprietary system.
Now it's car analogy time! So, after getting real good ROI and low TCO on your new car for five years you find that not only can't you sell it for any money, but you have to pay thousands of dollars to have it disposed of as hazardous waste (unless you trade it in for more of the same from the same compan). Is it still a good deal? Why do all the TCO "studies" done by "independent analysts" miss a point that should be obvious to anyone who's ever owned a car?
Most of those "independent analysts" prefer to limit their "TCO" calculations to one specific version (say, Win95 or NT4.0 or Win2000 or WinXP). I believe that is because that approach allows them to completely ignore any costs associated with upgrading those systems (the migration costs) for that system (that's why "independent" is in quotes). For example, if you used Win2000 when it was released and then switched to WinXP when it was released and still run WinXP today (so you've spent 5 years on Windows), you're actual expenses will include licenses and upgrade work that they will never include in their calculations.
Their approach is not so much "TCO" as "Product Cycle Costs". You may still be using the workstation and it may still have apps and data you need, but as far as they are concerned, all those factors cease to exist.
So, what does all this mean in a real world scenario? Not very much. Which is why I'm usually dismissive of such "indepentent studies" comparing their TCO "findings" of different systems. Comparing two cars is easy, comparing two different IT systems in two different companies is impossible. In fact, the only item of any real importance is the fact that your migration costs are not fixed. Migration costs are driven by the cost of the technology and the availability of the skilled techs to perform the migration. The more time you have between starting the migration and finishing it, the more money you can save. If you're looking at migrating from a proprietary system to an Open one, contact the vendor of the new system and give them the price you want them to hit for the migration. Then let them work on the technology and skills so they can hit that mark. A percentage point shaved off of the migration costs is worth more in the initial calculations than a percentage point improvement in TCO.
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