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Calculating Total Cost of Ownership A basic primer

May 31, 2008
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TCO IN ACTION

With an understanding of how to derive the TCO with the aforementioned formulae, now it can be applied to desktop PCs functioning in the real world. In the first example, the single office desktop PC is examined through its lifecycle and the TCO is determined.

The first item to consider (and that can be said for any Desktop PC or PC hardware purchase) is whether to purchase outright or to finance the purchase over time (such as leased equipment), and the ramifications of the each decision.

Outright Purchase

This approach incurs a higher initial cost than leasing, but it is a “one time charge” since the desktop PC is now owned and there are not any other purchase-related costs or finance charges coming at a later time. Also, the PC is owned by the user, whereas when leasing, the leasing agent and/or manufacturer holds a “security interest” on the PC for the duration of the lease and it some cases can repossess the PC due to non-payment.

A purchased and “owned” PC can also be sold used. This can be especially helpful in offsetting the cost of the replacement PC. There is a substantial market, largely thanks to the online auction phenomenon, for used PC equipment two years old and less. This works out for both the owner of the used PC and the buyer of it since the owner is getting funds to use towards newer technology (or other expenses) and the buyer is getting a machine at a very low price that is still functional for mainstream computing tasks (i.e. e-mail, word processing, and Web browsing).

Financing and Leasing

This approach allows for the PC to be paid off over time with monthly payments that can range from $30 to $150 per month, depending on what type of equipment is financed and the terms of financing (including annual interest rate). One thing is certain – the PC will cost more in the end by financing than purchasing it outright. One of the reasons is that an outright purchase does not accrue financing charges as leasing and financing do (unless carried on credit card or line of credit account, and those rates are substantially lower, or even zero percent in some cases).

Another reason for this inflated cost is the term of the transaction. A purchased PC is owned from day one. Conversely, the leased PC is not owned until the end of term 36 to 48 months in most cases. This is long after the PC technology is obsolete and has depreciated by almost 90 percent (there is not much demand in the used market, save for eBay, for a four-year-old PC, especially if it has been used for all four years). While the machine can be upgraded to an extent to increase performance, it does not compare to the newer technology available at the end of a 36 to 48 month leasing term.

Finally, there is the interest to consider. Interest can range anywhere from 15.99 to 23.99 percent per annum. On a four-year (48-month) lease of a $3,000 PC at 15.99 percent, the interest and cost of borrowing over time would cost over $1,600. This is in addition to the $3,000 principal cost of the PC, increasing the total purchase cost to over $4,600. TCO also increases since Phase 1 Acquisition costs would increase when finance charges over the term are considered.

Single Desktop PC Scenario

Phase 1: Acquisition

The desktop PC will be purchased outright for $3,000 (including taxes and delivery charges). The desktop PC includes an inkjet printer/scanner/fax and one color and one black ink cartridge. At the time of purchase, additional ink can be purchased at a substantial discount, so one of each cartridge is purchased for a cost of $30 each, or $60 total. A six-foot USB cable was also purchased to connect the printer/scanner/fax to the desktop PC for $20.00. The PC will also require about 10 feet of Ethernet cable to connect it to the network hub. The cost of the cable is $0.50 per foot. One ream of paper for the printer/scanner/fax will be provided from the office supply and incurs a cost of $5.00.

Hardware and Software Costs:

Maintenance and Materials Costs:

Desktop PC

$3,000

Color Ink Cartridge

$30.00

USB Cable

$20.00

Black Ink Cartridge

$30.00

Ethernet Cable

$5.00

Ream of Paper

$5.00

Total

$3,025.00

Total

65.00

P1

=

hs + mm

P1

=

3,025 + 65

P1

=

3,090

The Acquisition phase of the lifecycle of the desktop PC will cost $3,090.

Phase 2: Deployment

The desktop PC has arrived and will now be setup and made ready for use. The user, however, will have about an hour of downtime while IT staff set up the new desktop. This will present a cost of $200 per hour for every hour of downtime. The cost of the IT staff and Operations costs to set up the new desktop PC, register its MAC address on the network, and set up access is $300.

Since Maintenance & Materials were considered in Phase 1, they are not factors here.

P2

=

mm + O + d

Determine Downtime:

d

=

c • hd

d

=

200 • 1

d

=

200

Therefore, Downtime will cost $200.

P2

=

300 + 200

P2

=

500

The Deployment phase of the lifecycle of the desktop PC will cost $500.

Phase 3: Operations

The user of the desktop makes regular use of databases (e.g. Oracle, SQL) for their job duties, as well as regular office applications (e.g. word processing, Web browsing, and e-mail) multiple times per day. The Operations costs related to this PC is $500, with the related Administrative costs running at 15 percent of the Operations cost, and End-User Operations running at 30 percent of the Operations cost. The user experiences two hours of Downtime at a cost of $300 per hour, but they can still do about 50 percent of their work during the downtime. The user does not require support outside of that from the Database Administrator and that cost is accounted for in the Operations and Support phases. Shadow support is not a factor.

P3

=

O + A + ff + d + Oeu

Oeu

=

b + cssy

Oeu

=

500(0.30) + 0

Oeu

=

150

Since the downtime occurs during business hours, d = c • hd will be used to calculate the downtime. Note that since the user can still perform 50 percent of their job duties during the Downtime, d, must be divided by two, expressed as:

ff

=

500 • 0.03

ff

=

15

P3

=

500 + 75 + 15 + 300 + 150

P3

=

1,040

The Operations phase of the lifecycle of the PC will cost $1,040.

This shows that Operations of the desktop PC in the workplace will cost over 30 percent of what the desktop PC cost to purchase and bring in to the workplace. Add to that the cost of Deployment ($500), and now the TCO of the desktop PC is over $4,500 – over 50 percent higher than the cost of the desktop PC itself. Further to this, the Support and Retirement phases have yet to be considered. This illustrates how tracking TCO through lifecycles (and managing them properly) can show costs that may have been overlooked or not considered as a part of the asset cost.

Phase 4: Support

The main support that the user requires is from the Database Administrator, as well as routine technical support from the IT staff when necessary. That cost is this phase is covered in the supporting operations cost of the PC, which is $1,000, with Administrative costs running at 20 percent of supporting operations costs. The same Downtime, End-User Operations, and Maintenance & Materials as in Phase 3 apply here since the Support takes place alongside Operations.

P4

=

mm + Os + Oeu + A + ff + d

Remove non-factors:

P4

=

mm + Os + Oeu + A + ff + d

Oeu

=

b + cssy

Oeu

=

500 (0.30) + 0

Oeu

=

150

Os

=

1,000

A

=

200

ff

=

O • 0.03

ff

=

1,000 • 0.03

ff

=

30

P4

=

1,000 + 150 + 200 + 300 + 30

P4

=

1,680

The Support phase of the lifecycle of the PC will cost $1,680.

The TCO of the PC is now $6,220, with over 100 percent over the purchase price of PC spent on Deploying, Operating, and Supporting the PC. It can get quite expensive, so proper management is key in these phases to keep the costs down as much as possible. Operations and Support are usually the most expensive parts of lifecycle after the Acquisition phase.

Phase 5: Retirement

The desktop PC is being taken out of service and replaced with a laptop PC for the user. Operations costs to remove the old PC and set up the laptop for the user is one-half that of the cost of deploying the PC in Phase 2. Administration costs for retiring the PC are 20 percent of the Operations cost. The user will experience three hours of Downtime during the retirement, and set up of the laptop PC and the costs are the same as in Phases 3 and 4.

P5

=

O + A + d

O

=

150

A

=

30

3

P5

=

630

The Retirement phase of the lifecycle of the PC will cost $630.

At the end of the lifecycle of the desktop PC, the TCO totals $6,850, over twice the cost of the PC itself. The most expensive lifecycle phase was Acquisition, with Support running second. The least expensive phase was, with little surprise, Retirement.

The Total TCO for this desktop PC with lifespan of one to four years may seem like an exorbitant amount, but it is quite common throughout the modern workplace. One reason for this is that the tasks a user performs throughout the business day are dependent on IT and application support and access, all of which cost money in terms of equipment and personnel to manage and maintain. Further, the desktop PC functions as a gateway for the user to interface with all of the company’s systems and information assets, and delivering that access in a reliable way requires investment in network infrastructure and competent administrators to run it.

Workgroup/Department PC Scenario

Take what was learned in the single PC scenario and extend it to a workgroup or department model with 40 desktop PCs. From the outset, it may seem that the easiest way (and logical to an extent) to do this would be to take a single PC model like the previous, and multiply by forty. If done that way, the Acquisition phase costs will be substantially higher than necessary, the Operations and Support phase projections would not be entirely accurate. In addition, Downtime has a substantially broader effect on 40 users who are offline for a period of time than for the one user.

The Acquisition phase represents the largest capital outlay of the lifecycle: the IT asset. This is where good Lifecycle Management (LM) begins, since money saved in Phase 1 can be applied to other phases, or for other department expenses. One aspect of good LM is to get the lowest possible cost on all IT assets, without compromising functionality or necessity.

The question once again arises: to purchase outright or to finance?

When buying in volume, there are issues to consider that do not usually arise with the purchase of just one or two PCs. With 40 PCs from a single vendor, there may be incentives or service packages (e.g. maintenance contracts) that may make financing worth the additional cost. Further, if the benefits of the incentives and/ or service packages outweigh the cost of financing, then financing may be a good manner in which to proceed with Acquisition.

On the other side, when purchasing in volume from a single vendor, it is likely to offer a percentage discount that can range from 3 to 20 percent, depending on the vendor. A volume discount can provide good Phase 1 savings:

40 Desktop PCs @ $3,000

=

$120,000

40 Desktop PCs @ $3,000 w/10% discount

=

$108,000

40 Desktop PCs @ $3,000 w/15% discount

=

$102,000

40 Desktop PCs @ $3,000 w/20% discount

=

$96,000

At the 20 percent discount level, a savings of $24,000 can be gained. To put that in perspective, if the 40 PCs at $3,000 each were financed at 15.99 percent per annum, in one year there would be $19,188 in finance charges. This is a clear victory for an outright purchase, especially when a discount can be obtained. In addition, it is a fallacy to think that by financing IT assets with a vendor, the relationship is being financed as well. While vendors do pay attention to financed accounts (especially large ones), most of that attention is from the vendor’s financing or credit department and not customer or technical support.

In some cases, a vendor may closely court an account that purchases in volume outright and may provide a permanent discount for all future purchases to nurture the relationship. The quality of technical and customer support for both a financed and a purchase account is largely dependent on the competency of the personnel providing the support, rather than the nature of how an account is paid.

Now, let’s embark on the Acquisition phase of 40 desktop PCs from a vendor that cost $3,000 each. A 10 percent volume discount has been agreed on. There are no printers involved in this purchase; however, the Ethernet cable costs are the same as in the single PC model.

Hardware and Software Costs:

40 desktop PCs @ $2,700

$108,000

4 10-port 10/100 base-T hubs @ $100

$400

40 10-foot Ethernet cables @ $5

$200

Total

$108,600

Since 40 desktop PCs can be a task to manage and troubleshoot, the decision is made to purchase a service contract from the vendor for next-day, onsite service for one year for each desktop.

Maintenance and Materials Cost:

Next-day onsite for 40 PCs @ $99.99 each

$3,999.60

P1

=

hs + mm

P1

=

108,000 + 3999.60

P1

=

112,599.60

In total, this provides an Acquisition cost of $112,599.60 ($2,814.99 per PC, a lower cost than the regular price of a single PC, and with enhanced service from the vendor). This is an example of a well-managed Acquisition phase. Costs are controlled, but there is also a contingency plan for problems that may arise with the PCs with the enhanced service. The next-day onsite service can also help to mitigate downtime, which for 40 PCs (or even a couple of them) could cost substantial sums. Knowing that there will be a technical resolution within a certain timeframe allows a manager to delegate the user who is experiencing the downtime to other tasks or another PC. Having some users down can (and does) slow the entire department or workgroup since they must compensate for their peers and do their duties as well.

For example, 10 users are experiencing downtime, which costs $55 per user per hour of Downtime (business day formula). In addition, with 10 users down, the rest of the department is falling behind. After one hour of Downtime, every additional hour of Downtime for the 10 users causes the department to fall behind by twenty minutes, and starts to incur the same Downtime at the same rate:

  • 1 hour of Downtime x 10 users @ $55/per user/per hr = $550

  • 2 hours of Downtime x 10 users + 0.33 hours Downtime x 30 users @ $55/per user per hr = $1644.50

  • 3 hours of Downtime x 10 users + 0.66 hours of Downtime x 30 users @ $55/per user per hr = $2,739

Here, it can be seen that the cost of two hours of downtime is almost triple the cost of one hour, since the entire workgroup and/or department is now affected. When the downtime extends past three hours, the downtime now costs over five times more than it did for the first hour. This illustrates how essential it is to manage and minimize downtime, especially within workgroups during business hours.

These are two examples of lifecycle factors that can raise or lower TCO. The Acquisition with enhanced service for the PCs at a cost of less than the regular price of the desktop PC alone will contribute to lowering the TCO over the lifecycle. Controlling downtime during the business day (or night) will help to minimize the financial impact it has.

On the department/workgroup level, the Futz Factor may be more pronounced, since the Operations costs for 40 PCs are higher than that of one.

For example, with Operations costs running at $1,000 per user, the Futz Factor would be: 1,000 x 40 x 0.03 = 1,200 = $1,200

This shows a Futz Factor of $30 per user, which is not a large amount and may not adequate represent the actual “Futzers” within the workgroup or department. In many cases, there are usually only a handful of “resource hogs” or “bandwidth bandits” who use the office PCs for other than their intended purposes. These resource-intensive activities include online gaming, downloading or streaming audio and video files, or even sending large un-work related files through the company’s e-mail system.

Another resource consumer and cost increaser is poorly planned deployments. Doing deployments of new hardware, software, or network items during the business day can increase costs and slow productivity. On the department scale, new IT deployments should be done when:

  • The downtime impact is minimal (e.g. overnight or weekends).

  • The necessary IT staff is available to oversee the deployment.

  • The benefit of the deployment outweighs the cost of downtime.

  • Scheduled maintenance is being done.

For example, if a company has planned maintenance every Wednesday night from 4 p.m. to 8 p.m., then the deployment should be done during this time and preferably after users have left for the day. Properly managing the Deployment phase of the lifecycle will result in complete and correct deployments that occur on time and with minimal impacts to regular IT asset usage. This will contribute to less downtime and overall cost control in Phase 2 and throughout the lifecycle.

On the issue of Maintenance, it is a staple component of proper lifecycle management and contributes to keeping TCO within reasonable levels. At the workgroup and department level, proper maintenance of IT assets (including desktop PCs) reduces the likelihood of system crashes as well as ensures that PCs have the most current operating system patches and updates, including security updates.

Conversely, lackluster maintenance practices can result in increased downtime costs, as well as the risk that operating systems and software applications are not properly updated. This can drive up Operations costs, Support costs, and contribute to a higher TCO for each PC in the workgroup or department. One way to think of IT assets is like a performance automobile in that it needs proper maintenance and competent staff performing that maintenance.

IT staff who do not perform their duties in a proper and competent manner can contribute to higher Operations and Support costs, increased Downtime, as well as an increase in the shadow support phenomenon within departments and workgroups. If IT staff is not doing things properly, IT managers and administrators (or other IT staff) must “clean up the mess.” This increases the time it takes for IT duties to be completed and can put maintenance and other IT-related activities behind schedule.

This problem can be a result of an understaffed IT department (too few staff covering too many users) or an under-trained department (lack of experience or credentials). When activities (such as maintenance) take longer than scheduled, Downtime is increased and so are costs. Increased Downtime, falling behind schedule, and affecting overall productivity are the symptoms of sub-par IT staffing.

The presence of a sub-par IT staff will increase the shadow support within the workgroup. This will occur since users will become frustrated with the less-than-optimal IT support they are getting from IT and will seek out fellow users who they perceive as highly competent and knowledgeable for support. In addition, users who are able to offer support to other users will do so and it may or may not interfere with their regular job duties. If it does not interfere with their job duties, then it does not result in an additional cost. In fact, this would be a case where shadow support may decrease costs since it would allow for continuity of work being done instead of waiting for IT staff support. Conversely, if the shadow support conflicts with the support from the IT department, it will present a cost in both downtime and shadow support (as well as draw ire from IT staff and managers), since the IT staff will have to undo anything done incorrectly as well as perform their intended duties. Shadow support should be analyzed to make sure that it is not costing anything and to see if there is a net positive benefit to it.

It has been shown that Acquisition costs can really affect the TCO at the desktop level and that optimizing that lifecycle phase means:

  • Always seek out a discount on desktop PCs when ordering multiple units. Most vendors will offer it on purchases of 10 or more units.

  • Make sure that either the new units come with the needed operating system or there is enough software licenses already purchased for the new PCs. Many vendors offer operating systems alongside their PCs, but some charge an additional fee.

  • Research maintenance and enhanced service contracts to see what they provide and to see if those services overlap the IT departments services or complement them. All too often companies end up paying for duplicate services that are provided by both the vendor’s personnel and their own.

  • Avoid financing equipment for extended terms unless necessary. The long-term interest charges drive up the Acquisition costs and persist in doing so until the PC is paid off (even if it is retired before it’s paid off).

  • Purchase consumables, such as ink and toner, directly from the manufacturer or wholesaler versus a retailer.

Proper management of the Operations and Support phases (including the shadow support issue) involves focusing on the IT assets (in this case, desktop PCs) from the users’ point of view. By adopting the users’ mindset and method, it can be deduced how they interact with the PC, and thus provide a picture of what needs to be done to ensure maximized PC functionality and user performance. Some things to considering in managing these lifecycle Phases:

  • Minimize the impact of downtime by scheduling it during off hours, or close to the end of the business day.

  • Monitor shadow support to see if it costing more than it is making. As well, make sure that users who are providing shadow support are competent to do so and do not conflict with IT Operations or Support efforts.

  • Ensure that IT staff, especially those performing frontline support, are well versed in the software applications on the PCs. The staff should know how to both use and troubleshoot the applications.

  • Do not put off system retirements, since using older technology can result in downtime and non-uniformity within the workgroup or department. This makes it more difficult to do network-wide software or operating systems updates.

  • If maintenance contracts include onsite vendor personnel, then make sure the IT staff knows what it is doing and why to prevent service overlaps or lapses.

TCO has shown to be an effective IT costing model, especially when it comes to desktop PCs. By showing costs throughout the entire lifecycle, the real costs of each desktop PC in the workplace can be realized. Being able to know how much support (both from IT and shadow support) adds to the cost of each unit in operation can help IT departments and, by extension, companies create budgets that more accurately reflect actual costs.

TCO can show both good and poor Lifecycle Management, since managing it effectively will keep the TCO in check. This means that managers need to be involved in all phases of the lifecycle. Their involvement will ensure that proper personnel and resources are allocated effectively and with minimal costly downtime and overlap. Managers should also be aware of user trends (including shadow support) so they have a better idea of what users really need.

An immense benefit in applying TCO to desktop PCs is that it shows things that are not always lucid when looking at the cost of the IT asset. When an IT asset is being purchased, the main area of concern is how much does the IT asset cost to acquire, and possibly to deploy. How much the shadow support aspect is going to cost or how much Maintenance & Materials will run is not always front-and-center. These hidden costs manifest themselves once the asset is in operation and, if the asset was paid too much for, it will come out at some point during the lifecycle of the asset.

Applying TCO to Lifecycle Management of the desktop PC reveals costs that may never have been considered before as well as helps IT departments and companies make better PC purchasing choices. By knowing what they will spend from receipt to retirement of the PC, a company can plan its PC purchases on a regular basis with optimal value for dollars spent as well as get the most from their desktop IT assets through their entire lifecycle

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