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Basic approches to Total Cost of Ownership calculating the value of Hardware

May 29, 2008
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TCO: Basic FORMULA

TCOtransaction (or TCOt) gives the total TCO of the transaction overall.

TCOtransaction

=

the sum of all the five phases of the asset lifecycle

TCOt

=

Phase1 + Phase2 + Phase3 + Phase4 + Phase5

TCOt

=

P1 + P2 + P3 + P4 + P5

Calculating the Cost of Lifecycle Phases

Now, even with a “master equation,” it gets a bit more detailed since each Phase (P) of the lifecycle contains its own equation(s) for determining the value (cost) of the Phase. In the prior post the Phases were expressed in terms of which costs (indirect and direct) occur within them, as well as what transpires during each phase. Now they will be expressed as formulas encompassing the costs (both direct and indirect) within them.

Phase 1 (P1) – Acquisition

P1

=

Hardware & Software + Maintenance & Materials

This can be expressed as:

P1

=

hs + mm

For example, an IT asset has a Hardware & Software cost of $5,000 and a Maintenance & Materials cost of $450. Therefore:

P1

=

5,000 + 450

P1

=

5,450

This shows that Phase 1 (the Acquisition phase) has a cost of $5,450.

Phase 2 (P2) – Deployment

P2

=

Maintenance & Materials (unless considered in P1) + Operations + Downtime

This can be expressed as:

P2

=

mm + O + d

The Downtime (d) cost is unique to each business environment since IT and network resource demand and value-in-dollars vary widely across industries. In addition, downtime during the business day (or business hours) may have a more profound impact than downtime occurring overnight. Two ways to determine downtime in dollars are:

  1. 24-Hour Downtime Formula: This formula should be applied to determine downtime for organizations where 24-hour IT asset and network functionality is essential to business performance and duty completion. In this formula, the cost of a 24-hour period without IT is multiplied by the percentage of the actual period without IT that occurs (e.g. 12 hours is 50 percent, or 0.5) or will occur in the near term.

    Downtime (d)

    =

    cost of 24 hours without IT (c) multiplied by the percentage of 24 hours without IT (p)

    This can be expressed as:

    d

    =

    c • p

    For example, 24 hours without IT costs $10,000, and IT will be down for six hours (i.e. 25 percent of 24 hours). Therefore:

    d

    =

    10,000 • 0.25

    d

    =

    2,500

    The Downtime will cost $2,500.

  2. Business Day Downtime Formula: This formula is intended to determine downtime for organizations whose IT needs are highest during business hours and downtime overnight or after those hours will not have an adverse affect on productivity or work completion, and thus will not incur downtime-related costs. This formula should also be used when downtime will occur when no users or systems need the IT resources that are being taken down.

    Downtime (d)

    =

    cost per business hour without IT (c) multiplied by # hours of downtime (hd)

    This can be expressed as:

    d

    =

    c • hd

    For example, Downtime costs $3,500 per business hour without IT, and IT will be down for three business hours, and five hours overnight that will have no impact. Therefore:

    d

    =

    3,500 • 3

    d

    =

    10,500

The downtime will incur a cost of $10,500, and note that only three hours of the downtime were considered, since the remaining 5 hours (the majority of the downtime) took place after business hours and business was not interrupted except for the 3 hours considered.

Now, with downtime methodology established, the phase can now be assessed.

For example, deploying a cluster of 10 PCs with a Maintenance & Materials cost of 150 per PC (1,500 total), and an Operations cost of this phase of the lifecycle of $5,000, and the Downtime will be 12 hours, four of which are during business hours and the rest are overnight. Downtime during business hours costs $2,500 hour.

P2

=

mm + O + d

P2

=

10(150) + 5,000 + 4(2,500)

P2

=

1,500 + 5,000 + 10,000

P2

=

16,500

This shows that Phase 2 (the Deployment phase) will cost $16,500.

Phase 3 (P3) – Operations

P3

=

Operations + Administration + Futz Factor (ff) + Downtime + End-User Operations (Oeu)

This can be expressed as:

P3

=

O + A + ff + d + Oeu

The Futz Factor can be determined in several ways and, like Downtime, is unique to each business network environment and enterprise. One common trait is that both cost money, and therefore contribute to cost. That is the focus here – how the Futz Factor contributes to the cost of Operations and the TCO overall.

To this end, the Futz Factor will be determined by taking a certain percentage of Operations dollars as an additional cost to account for. The percentage will be a constant based on statistical variance, of 0.03 or 3 percent. This percentage of Operations dollars is not deducted from the Operations amount, but is added as an additional cost.

This can be expressed as:

ff

=

O(0.03)

For example, if the Operations costs are $15,000, then:

ff

=

5,000(0.03)

ff

=

450

Therefore, the Futz Factor for this phase is $450.

End-User Operations is an indirect cost that is determined by two factors: items planned for in project budgets and the “shadow” support phenomenon. This amount is highly fluid and depends on how well the users who are performing support duties do their primary job duties and how the costs are associated with that. It can be very expensive, especially if the cost of shadow support gets out of control. Conversely, in some cases, some users may be so efficient that their shadow support of other users does not interfere with their job responsibilities, thus incurring no additional cost. In other cases, organizations have a strict support structure that extends from the IT department outward so shadow support does not occur or is piecemeal. In such cases, the shadow support cost would be zero.

In cases where shadow support does incur a cost, two methods of computating that cost are:

Shadow Support Cost per Day (cssd)

=

amount of time per day from job responsibilities (td) multiplied by user cost per hour (c) multiplied by number of users performing shadow support duties (nssd)

This can be expressed as:

cssd = td • c(nssd)

To find the css for the entire year (i.e. cssy), simply multiply by the number of workdays in a year, which can vary from business to business. By having both daily and annual values easily obtained, this provides for flexibility in determining this variable and that can aid in specifically gearing the proper analysis to the unique aspects of the organization.

Shadow Support Cost per Day (cssy)

=

Shadow Support Cost per Day (cssd) multiplied by the number of work days in a year (nwdy)

This can be expressed as:

cssy = cssd • (nwdy)

For example, a user’s shadow support of another user takes 1.5 hours per day of time away from his primary job responsibilities. His cost to the company per hour is $45.60. Therefore:

cssd

=

1.5 • 45.60(1)

cssd

=

68.40

The shadow support costs per day are $68.40.

End-User Operations (Oeu)

=

planned budgets (b) + shadow support costs (cssy)

This can be expressed as:

Oeu

=

b + cssy

For example, a department has an End-User Operations annual budget of $5,000. The department has two users who cost $47.55 per hour each and spend about 75 minutes per day supporting other users. Determining Shadow Support Costs per Day (cssd) is the first step:

cssd

=

td • C(nssd)

cssd

=

1.25 • 47.55(2)

cssd

=

1.25 • 95.10

cssd

=

118.88

The cost of shadow support per day is $118.88. Next, calculate Shadow Support Costs per Year (cssy):

cssy

=

cssd·(nwdy)

cssy

=

118.88 • (nwdy)

cssy

=

118.88 • (320 working day year)

cssy

=

38,040

The cost of shadow support per year is $38,040. Finally, calculate the cost of End-User Operations (Oeu):

Oeu

=

b + cssy

Oeu

=

5,000 + 38,040

Oeu

=

43,340

The End-User Operations cost is $43,340.

Now, apply all variables and formulas to find the value of Phase 3 (Operations).

For example, IT Operations costs run at $30,000 per month and Administration costs run approximately $10,000 per annum. There is downtime for planned maintenance every Tuesday evening from 5–11 p.m. and has no effect on the system performance. There is average downtime during business hours of 30 minutes per day, at a cost of $500 per hour. The End-User Operations Budget is five percent of the Operations budget. Three end users each provide around one hour of shadow support per day, at an average cost of 43. 50 per hour. The company has a 320-day work year (Monday–Saturday).

P3

=

O + A + ff + d + Oeu

Find the core values:

O

=

30,000 •·12

O

=

360,000

A

=

10,000

ff

=

30,000 (12 months in year) • (0.03)

ff

=

360,000 • (0.03)

ff

=

10,800

d

=

c • hd

d

=

500 • 0.5

d

=

250

d per annum

=

(250 • 320) = 80,000

And where Oeu = b+ cssy:

b

=

5% of Operations Budget

b

=

360,000 • 0.05

b

=

18,000

cssd

=

td • c(nssd)

cssd

=

1 – 43.50(3)

cssd

=

1 • 130.50

cssd

=

130.50

cssy

=

cssd • (nwdy)

cssy

=

130.50 • (320)

cssy

=

41,760

Oeu

=

18,000 + 41,760

Oeu

=

59,760

Therefore:

P3

=

O + A + ff + d + Oeu

P3

=

360,000 + 10,000 + 10,800 + 80,000 + 59,760

P3

=

520,560

This shows that Phase 3 (the Operations phase) costs $520,560 over one year.

Phase 4 (P4) – Support

The support phase of the lifecycle is a phase within phase; that is to say, it exists in congruence with the Operations phase. However, supporting and operating an IT asset are two different functions. Operating an IT asset means using the asset for an intended business purpose and in a manner that would facilitate the performance of job duties.

Supporting the IT asset involves two duties. The first duty is to provide the necessary technical resources and guidance to the end users of the IT asset. The second duty is to make sure the software and operating systems that the asset is dependent on for functionality are updated and maintained.

Operationssupport (Os) references IT Operations costs specifically related to support activities of either users or the IT asset. This is usually a portion of the IT department’s or Operations’ budget specifically earmarked for expenses related to supporting IT users on IT assets throughout the organization. The amount varies widely from company to company and depending on the support needs.

P4

=

Maintenance & Materials (mm) + Operationssupport(Os) + End-User Operations (Oeu) + Administration (A) + Futz Factor (ff) + Downtime (d)

This can be expressed as:

P4

=

mm + Os + Oeu + A + ff + d

For example, determine the 40 desktop PC Support Phase (P4) costs of the XYZ Company, whose annual IT Operations budget is $480,000 per annum, with 10 percent of that allocated to End-User Operations and 25 percent allocated to supporting Operations. Network and systems work is done overnight so that downtime does not affect productivity or performance. Administration costs equal five percent of the amount allocated to End-User Operations. Maintenance & Materials costs were previously considered. XYZ Company runs on a 320-day working year (Monday–Saturday). Shadow support is not an issue here since only IT staff troubleshoot users’ machines.

First, eliminate non-factors (mm and d), and then re-state the formula:

P4

=

Os + Oeu + A + ff

Next, find core values:

Os

=

25% of 480,000

Os

=

480,000 • 0.25

Os

=

120,000

And where Oeu = b + cssy:

b

=

10% of 480,000

b

=

480,000 0.10

b

=

48,000

cssy

=

non-factor

Oeu

=

48,000 + 0

Oeu

=

48,000

A

=

5% of 48,000

A

=

48,000 • 0.05

A

=

2,400

In determining the Futz Factor for this phase, Os is considered instead of O as was done in previous phases.

ff

=

3% of Os

ff

=

3% of 120,000

ff

=

120,000 • 0.03

ff

=

3,600

Therefore:

P4

=

Os + Oeu + A + ff

P4

=

120,000 + 48,000 + 2,400 + 3,600

P4

=

174,000

This shows that Phase 4 (the Support phase) costs $520,560 over one year.

Phase 5 (P5) – Retirement

The Retirement phase of the lifecycle is where the IT asset is taken out of service and a newer asset or existing capable asset takes over its duties.

P5

=

Operations (O) + Administration (A) + Downtime (d)

This can be expressed as:

P5

=

O + A + d

For example, a company is retiring five Windows 98 desktop PCs and will be replacing them with five Windows XP Desktop PCs that were recently purchased. The Administration costs of retiring and replacing the PCs is $1,000, and will involve six hours of network and system downtime, three of which are during business hours at a cost of $300 per hour. The Operations cost of the retirement phase is $2,500.00

P5

=

2500 + 1000 + 900

P5

=

4400

The cost of Phase 5 (the Retirement phase) is $4,400.

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