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Making the PC Life Cycle work for you understanding Total Cost of Ownership TCO

May 27, 2008
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Managing the PC Lifecycle—Total Cost of Ownership

Applying TCO to lifecycle management of desktop PCs reveals hidden costs and helps IT leaders make better PC purchasing choices. Use this report to understand the detailed steps involved in calculating PC TCO.

INTRODUCTION

Total Cost of Ownership (TCO) is a costing analysis model that is used for all costs incurred and associated with an asset over its lifecycle. It was developed by Gartner Inc. (www.gartner.com) during the last years of the 1980s as a method to determine whether an organization will benefit from a specific technological implementation or acquisition. The TCO concept initially met with industry and economic scrutiny, as do most analytical concepts and theorems in their infancy. However, this form of analysis and its ability to price out the total cost of an asset throughout its lifecycle soon gained industry acceptance as an IT costing analysis model, and has been in use ever since.

This is not to say that the TCO concept is free from critique or detraction. One of the more vocal detractors has been Forrester Research. However, TCO has demonstrated an ability to point out hidden costs and showcase the very reason why so many IT departments fail to practice the analysis method. Properly practiced, TCO can be very revealing about spending decisions and can highlight lackluster department management of both money and manpower.

DIRECT AND INDIRECT COSTS

Before embarking on a TCO calculation, one must first understand the different areas of cost must be addressed by the calculation itself. In general terms, there are two types of cost factors that compose the TCO of a given IT asset: direct costs and indirect costs. The direct costs are the most lucid and common expenditures. They include:

  • Hardware/ Software. Includes purchasing, delivery, leased equipment, and financing costs (e.g. finance charges), as well as associated hardware/ network equipment costs. These costs include (but are not limited to) network hubs, routers, cabling, Network Interface Cards (NICs), UPS (Uninterrupted Power Supply) devices, as well as any other items that will be required to connect the asset to the network or workgroup and deploy it successfully.

  • Maintenance & Materials. Includes digital storage media needed for data backup (e.g. CD-RWs, DAT tapes, etc.), any spare parts, as well as any maintenance contracts from the equipment vendors or system consultants (e.g. UNIX consultants). Consumable items such as ink and toner cartridges and paper for IT assets of the printing type are also taken into consideration as Maintenance & Materials costs.

  • Operations. Includes all labor costs for technical and user support of the IT asset for proper operation, such as necessary IT staffing costs (e.g. a Systems Administrator or help desk personnel). Facilities costs, such as a dedicated server room with fire and air control systems, are taken into consideration. Other Operations costs are associated network costs determined by network demand and the bandwidth usage of the asset, as well as any domain registration costs that are incurred.

  • Administration. These are the human resources costs (e.g. finding and hiring of necessary staff), as well as any costs incurred by the finance and purchasing departments of the organization specifically for the IT endeavor. This would also include any training costs of both IT staff and end users, including any professional certifications necessary to administer and operate the IT asset (e.g. CCNP for Cisco equipment).

The indirect costs are those that are less visible and may or may not apply in all cases. These are:

  • End-User Operations. Include the ongoing support of the end users of IT assets throughout the organization in two ways. First, through planned project budgets or investments specifically designated to the asset. Second, through what is known as “shadow” support. This occurs when advanced and skilled end users, within a department or workgroup, become part of the support structure on top of their regular job duties. They amalgamate into the support structure because of their profiency with the IT asset and its operation as well as their ability to help other users.

  • Downtime. Includes both scheduled (part of network maintenance or for an installation) and unscheduled (such as that caused by a power failure or system crash) downtime. Anytime the IT asset is not available to users and, thus, not performing the intended function of the asset is considered downtime.

  • “Futz” Factor. This is also a concept from Gartner, and it accounts for usage of the IT asset for other than the intended purpose (e.g. online gaming or chatting) and thus using resources for non-business purposes.

FIVE PHASES OF AN ASSET LIFECYCLE

The next step in calculating TCO is to understand the different stages in a given IT asset’s life. The lifecycle of an IT asset consists of five phases: Acquisition, Deployment, Operations, Support, and Retirement. Each of these phases is relevant to the TCO of the asset in that each contributes its own unique cost set to the total cost of owning the asset in question. The phases, in detail, are:

Phase 1 – Acquisition: This phase consists of the process of purchasing the IT asset and awaiting its delivery. Any lease agreements or financing plans also take place in this phase. In this part of the lifecycle, TCO costs taken into consideration are: Hardware & Software as well as Maintenance & Materials if they were acquired at the point of purchase of the IT asset.

Phase 2 – Deployment: This is the phase where the IT asset is set up and the necessary software installed for use within the organization. This is the time when the IT asset would be placed on the office or enterprise network and made ready to perform its intended functions. The direct cost in this lifecycle phase is Maintenance & Materials (unless previously considered during the Acquisition phase) since both of those issues should be resolved before the asset is deployed. In addition, the first Operations costs begin to incur since the asset is now active and staff is spending time (and dollars) interfacing with it. This phase can also involve the indirect cost of Downtime, if network or system usage is disrupted when bringing the new asset online.

Phase 3 – Operations: This is the functionality phase of the IT asset, where it is performing its intended duties in an optimal manner. This where the direct Operations and Administration costs occur, as well the as indirect costs of the Futz Factor (since users now have access to the asset) and Downtime since normal operations usually include Downtime for maintenance and patching. Also, the End-User Operations cost comes into consideration in this phase as well since users are developing skills with the asset and some will use those skills to support others.

Phase 4 – Support: This phase occurs within the Operations phase, since the IT asset must be “operational” and functional in order for users to use it and to require support in doing so. This phase includes both supporting the end users in the operation of the asset as well as the maintenance of the asset itself. The direct costs in this phase are varied, and can include Maintenance & Materials, Operations, and Administration costs. The indirect costs can include End User Operations (especially the shadow support aspect), Downtime (support and maintenance may require a users PC or a the entire network to be taken offline), and the Futz Factor (a common side-effect of the shadow support occurrence) especially when a skilled user’s zeal to solve problems extends beyond the reach of their skill set.

Phase 5 – Retirement: This is the last stage of the lifecycle of an IT asset. Here, the asset is taken out of service and often replaced with newer technology or its duties are delegated to another IT asset already in use. The direct costs incurred during the Retirement phase are Operations (since IT staff will have to take the asset offline and replace it in some manner) and Administration (since a new IT asset will involve purchasing and finance decisions). For indirect costs, the main issue is the Downtime involved from taking the old asset off the network and replacing (and installing) the new asset.

TCO can be interpreted in two fashions:

  • First, as the accounting of total costs incurred with the purchase of an IT asset throughout its entire lifecycle.

  • Second, as the cost of managing and utilizing an IT asset that has been purchased and is in current use.

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