A few weeks ago I had the pleasure of spending time with about 20 CIO's ranging from multi-national organisations to local USA health providers, together with a number of CTO's from large software vendors. The subject of ROI and TCO came up in the context of which desktop model is the most cost effective in terms of justifying increased capital expenditure to enable desktop virtualisation.
I was slightly surprised that only two CIO's could state their TCO, but on reflection should I have been? The sad fact is that many organisations have lost sight and control of their IT estate. The continuous drive for new products and services at a pace that is set to beat the competition at the expense of infrastructure efficiency is all too well known by CIO's and CTO's. You only need to keep upper most in your mind that we virtualise because we have servers that are underutilised. I think the figure is still sub 10% utilisation for server's pre virtualisation. How many CEO's know they have capital tied up and not making a return? Not enough in my opinion!
So to the subject of money, ROI and TCO, which one should we focus on? One of the group, who is an analyst, and ponders these things for a living, believed that we should focus on ROI, but my view is that you need to focus on both, as TCO is an element of ROI. However there is more to this than an academic debate about method and calculation. Consider this hidden box of treasure:
TCO = SUPPLIER BASE COST multiplied by a
SUPPLIER EFFICIENCY FACTOR to which you add an
R&D FACTOR as well as a PEOPLE INVESTMENT FACTOR and the PROFIT MARGIN
Then multiply this by a RISK FACTOR (you will be seen as a risk by the supplier in some shape or form)
And then modify up or down depending on how tough the competition is or soft you areJ
Many people I talk to do not give a second thought to the overall efficiency of the supplier they are buying from and even less thought to the efficiency of their supply chain. In my simplistic view as detailed above if we could work out what the base cost of a supplier was we would modify this up or down depending on how efficient, or inefficient they were. Again we need to consider if a supplier is investing in R&D (assuming they need to) and importantly are they growing the skills of their people to fulfil the demands their clients are putting upon them. In moments of madness I do compare and contrast what salesmen are attempting to sell me (me being Government rather than me being an actual buyer) and what is actually being bid. It might surprise you to know that invariably what is bid is a lot more mature, polite for old. We shouldn't be surprised as our suppliers are full of people like you and me, all working hard to do a good job, but skilled in what the business needs today, not what the business might need in a few years time. After all would you look to sell something that wasn't your core competence and something that you were not particularly experienced in?
The red herring of the profit margin, yes red herring. Many a time I have split my sides guffawing at procurement experts haggling over a 1% reduction in profit margin, although the bulk of the TCO is in the suppliers base cost, the supplier's efficiency, the suppliers R&D etc. It's the table magician trick of deflecting the eye from the hand that is doing all the workJ finally to the final two elements, risk and competition. In terms of risk suppliers rightly have to ask themselves if the client is going to increase or decrease the risk of the project. If you give the impression of being disorganised, if you have a track record of failure, or are always changing your mind, it would be right for suppliers to factor this into their costings, after all time is money. I know we get agitated every time a supplier raises the change control card, but that is what it is there for, it is a valid control point, but be under no illusion an element of risk will be in the TCO somewhere. Finally in the TCO there is always an element of judgment in the price. Some of this is driven by how stiff the competition is. Suppliers don't bid on the basis that they want to lose. Bidding costs money, someone has to pay for it, but suppliers won't throw away a deal for a small shift in the overall TCO calculation.
That's a lot about TCO, but what about ROI. Well for me this is simple, well not that simple but we will keep it high level. Basic ROI is about ensuring that the overall benefit you are getting from the investment you are making is greater than the cost. TCO is just an element of the cost of a project but important to know if you really want to drive ROI. I have never brought the idea of an IT project; every project is there to deliver a business outcome whether it is customer driven, or internal efficiency or effectiveness. It just so happens that today a lot of projects are fundamentally underpinned by the use of IT. Our jobs as CIO's is to help the business deliver its objectives at the most appropriate capability for the most appropriate price.