Introduction
Total Cost
of Ownership (TCO) is a model that helps enterprises understand
the direct and indirect dollar costs associated with owning and
using an Information Technology (IT) component throughout its
lifecycle. You can think of TCO as the sum of all the
"little costs" that go into acquiring, installing, and
managing computers, networks, and applications. The collection
of costs can be partitioned into a TCO Model and used with a
management methodology to form a decision support tool. The
combination of a TCO Model with a methodology provides an IS
professional with the understanding of all costs associated with
the computer systems, and a decision making tool on how to best
to manage and improve the systems, delivering more value to the
business from the IT investments. Working with Microsoft, Inc.,
Interpose has developed a TCO Model and an associated TCO
Lifecycle cost management methodology that for the first time
makes TCO measurable, and directly usable to create actionable
IT improvement plans.
The
Microsoft and Interpose Total Cost of Ownership (TCO) Model
The
Microsoft and Interpose TCO Model divides the total IS costs
into two classifications:
1.
Direct
IT expenses,
those items that are typically budgeted to the IS cost center,
such as hardware, software, management labor, operations labor,
development and communication fees
2.
Indirect
IT expenses,
those items that are not budgeted and often go un-accounted for
in most organizations including end user self and peer support,
casual learning, and productivity losses due to downtime.
Direct
costs
can be obtained through analysis of typical IS budgets. But,
upon initiating a TCO assessment of an organization, the first
realization is that organizations often do not have a handle on
their total budgets. Most organizations do not track IS costs
accurately because they often do not know how many assets they
have and their location, do not know total headcount or where
labor is being expended. All of this information can be
discovered through a little research and an organizational
framework provided by the TCO Model on where to locate and
record relevant costs. The TCO Model and associated TCO
Lifecycle cost management methodology provides a framework to
investigate total direct costs and document them in one place.
Indirect
costs,
those IS costs borne by end users providing IS support to
themselves and peers, are hardly ever measured by IS
organizations. But it is the indirect costs that can grow
unchecked as IS budgets are slashed and the burden of IS support
is shifted from the traditional IS organizations directly to end
users. According to the our research, the average organization
can have more than 50% of the total costs allocated to such
indirect expenses. Most alarming is that these costs over the
past ten years have tripled, and that most of the cost growth
has been outside of traditional IS budgets. These costs are
harder to quantify for most organizations. Costs can be
estimated however by reviewing help desk records on support to
determine downtime of assets, and by surveying users to
determine issues such as where they go for support (help desk or
peers), and how much time they spend repairing, tuning, and
learning about their systems and applications. Again, the TCO
model and associated TCO Lifecycle cost management methodology
can assist on organizing the end user research and quantifying
the indirect costs.
To define
the TCO model further, the direct and indirect cost
classifications are divided into cost categories. These are
defined to easily capture costs so that research can be
performed on the industry average cost of ownership, and
individual organizations can research and record costs easily.
It is also important to develop a model where cost categories
and sub-categories are granular enough to be actionable, i.e.
Products, best practices, or training can be applied against the
categories and the impact can be measured.
The issue
with many of the TCO models in use today is that they were
developed from a researcher's perspective. This TCO Model takes
a different approach, building upon the TCO Lifecycle
methodology to create cost categories and sub-categories which
can be useful in analyzing, improving, and managing costs.
Major
Cost Categories
Interpose
and Microsoft have collaboratively developed a TCO Model with
the following major cost categories:
Budgeted
(Direct expenses)
o
Hardware
and Software (capital expenditures and lease fees for new
installations, upgrades, and updates)
o
Management
(network, system, and storage administration labor and
outsourcing fees, reactive and proactive management tasks)
o
Support
(helpdesk, training, purchasing, travel, maintenance and support
contracts, overhead labor)
o
Development
(application and content development, test, and documentation
including new developments, customizations, and maintenance)
o
Communications
Fees (lease line and server access charges)
Unbudgeted
(Indirect expenses)
o
End
user costs (peer and self support, casual learning, and
"futz")
o
Downtime
(lost productivity due to planned and unplanned outages)
Total
costs and cost allocations amongst these categories will vary
from organization to organization based on many factors
including the types of technology present, as well as the
processes and people managing and using the technology. The TCO
Model provides a methodology (the TCO Lifecycle) in which to
understand industry average costs for a given collection of
assets (TCO Benchmark), and to collect actual cost information
from an organization, comparing it to the industry averages (TCO
Baseline). As well, the methodology and model can be used for
analyzing the costs and benefits of planned improvement projects
to determine their financial viability (TCO Improvement).
The TCO
Model contains industry average "benchmark" data that
was collected using a multi-client study of 120 companies by IDC,
with participating organizations ranging from medium sized
organizations, to multi-national conglomerates. Other analyst
firms can publish their research into the model to compare
multiple industry averages for a particular environment against
actual costs.
In the TCO
Model, the total costs for each asset are presented per year
(annual costs) to account for all expenditures on PC and network
related IS expense during a selected 12 month period. For the
TCO Benchmark, the labor costs were collected for the 12 months
of 1996. Hardware and software pricing and labor rates were
revised to account for price changes detected during the first
half of 1997.
Many TCO
Benchmarks estimate an organization's average costs for a
particular environment by providing industry average costs per
client, and relying on a heterogeneous set of assets, and fixed
ratios of clients to servers and other complexities (Gartner
Group 1997). In these models you multiply the cost per client by
the number of clients to obtain an average TCO estimate. This is
often too simplistic to generate an accurate average TCO figure
that can be used for comparisons to actual TCO.
The
simulation technique used in Microsoft and Interpose TCO Model
are more advanced, providing different benchmark costs for each
type of asset (server vs. client vs. printer, etc.), the asset's
classification (i.e. laptop vs. desktop, file/print vs.
application server), and operating system (Windows 3 vs. Windows
95). This TCO Model accounts for each asset individually,
representing a method of tuning TCO Benchmark costs based on the
precise heterogeneous mix of assets, ratios of servers to
clients, users to printers, and network topology to name a few.
As well, the model has planned enhancements for industry and
international segmentation of TCO benchmarks in the near future.
Beneath
the major cost categories listed above, the Microsoft and
Interpose TCO Model has many detailed cost categories for
allocation of labor, fees, and expenses. The detailed costs
allow for an organization to measure expenditures, uncover
trouble spots, and determine the impact of planned changes.
These details in the model are balanced to provide the best
level of precision verse ease of use and understanding of
results. Before examining the cost categories in detail, first
it is important to understand what was included in the
collection of the average cost data to create TCO Benchmark
reports, and what should be included in actual cost data
collection for TCO Baseline analysis.
TCO
Model Scope
The TCO
Model treats in-scope the following general costs:
·
Client/server
computing systems and the resources that manage and support them
·
Network
communication devices such as hubs, bridges, routers, and
switches and the resources that manage and support them
·
Depreciated
hardware acquisition expenses (three year straight line
depreciation is assumed)
·
Expensed
new software and upgrades, including operating systems,
off-the-shelf applications, application development tools,
utilities, communication and connectivity applications
·
Travel
fees associated with IS management and support
·
Client/server
maintenance and support contracts
·
Supplies
such as tapes, diskettes, and toner cartridges.
·
Training
course development, delivery time, and course time and fees for
IS personnel and for end-user computer and general application
skills training (not business applications training)
·
Communications
costs including lease line fees and RAS connections that are
assessed to the client/server systems
·
Development
resources (design, development, test, and documentation)
dedicated to developing IS and applications infrastructure, and
customizing off the shelf applications for general productivity
applications
·
Costs
for end user support that is borne by non-IS personnel (self
support, peer support, remote office personnel who part or full
time support users or the network)
·
Lost
productivity from serious problem resolution time and network
resource downtime
·
Allocated
data center fees and headcount relating to client/server systems
·
Burdened
labor rates are used
The TCO
Model currently treats as out-of scope the following general
costs:
·
Mainframe
systems and applications including related capital, management,
and support costs.
·
Data
center resources not associated with the client/server systems
·
Development
resources allocated to design, development, test, and
documentation of business applications, those applications that
are related to generating revenue or managing raw materials,
products, and customers.
·
Paper
for printers
·
Business
losses due to downtime
·
User
productivity changes based on systems and applications
Various
organizations may account for assets and costs differently than
what is indicated in the TCO Model, such as different
depreciation schedules and other accounting policies.
Regardless, the TCO Benchmark and TCO Baseline (the actual cost
data collected in particular) should be reconciled against the
TCO Model standards for in-scope and out-of scope analysis. This
verification will insure that only data relevant to the analysis
is collected, and that comparisons of TCO Benchmarks to
Baselines are comparing like data sets and costs.
Detailed
Description of Cost Categories
The
Microsoft and Interpose TCO Model utilizes the following
detailed cost categories:
Hardware
and Software Costs
Hardware
and Software Costs are the annual capital expenditures
associated with PC and network hardware and software. Included
are the acquisition fees (depreciated over three years using
straight-line depreciation), upgrade, update, and disposal fees
for the assets. Assets include PCs, laptops, servers,
peripherals, hubs, bridges, routers, switches, printers,
scanners, and network wiring.
|
Cost
Sub-Category
|
Definition
|
|
Hardware
Costs
|
Annual
expenditures on new and upgraded client, server, and
network hardware.
|
|
Acquisition
and Disposal
|
The
annual capital expenditures associated with the
acquisition and disposal of computers, peripherals
(printers and scanners), and network hardware (hubs,
bridges, routers, and switches). The acquisition fees
for clients and servers include initial computer,
memory, storage, and applications. As well, a fee is
included for asset disposal fees
Acquisition costs are amortized over a three year based
on the original purchase price. For a benchmark
analysis, all of the assets are assumed to be replaced
on a three year basis, meaning that each asset has an
acquisition cost equivalent to 1/3 of the original
acquisition cost.
When calculating the baseline (actual costs), the
analysis should include a single year's worth of
depreciation expenses for all assets that are currently
not fully depreciated. The depreciation fees are
recorded using a three year straight line depreciation.
New assets (purchased within the analysis year) should
utilize a full year of depreciation expense regardless
of when the asset was brought into service. Assets that
are currently fully depreciated should be included in
the analysis of total assets for total cost analysis,
but, for the baseline, analysis will not have any costs
indicated in acquisition costs because they are fully
depreciated. Thus, if assets are in service longer than
three years, the organization will have acquisition
costs lower than the industry average benchmark figures
(although other costs such as upgrades and repairs may
be higher).
Lease fees are not included in the acquisition expenses
and are handled in another category (lease fees) below.
|
|
Memory
|
The
annual capital expenditures for upgrades to computer
memory. The memory upgrades are expensed.
|
|
Storage
|
The
annual capital expenditures for upgrades to computer
hard disks and other on-line network storage devices.
The storage expenses are expensed.
|
|
Peripheral
Upgrades
|
The
annual capital expenditures for computer peripheral
device updates and upgrades including adding a CD-ROM
drive to a computer, multi-media accessories, and
printer memory. The peripheral upgrades are expensed.
|
|
Connectivity
Hardware Upgrades
|
The
annual capital expenditures for upgrading and updating
network hardware including such items as network cabling
network cards, and adding ports to routers. The
connectivity hardware upgrades are expensed.
|
|
Other
Hardware
|
The
annual capital expenditures for spares. This fee is
expensed.
|
|
Software
Costs
|
Annual
capital expenditures on new and upgraded client and
server software. Software is expensed in the year the
analysis is being performed.
Maintenance contracts are not included.
|
|
Operating
System
|
The
annual capital expenditures on new and upgraded
operating system licenses for the desktop and servers.
|
|
Application
Software
|
The
annual capital expenditures for new and upgraded
off-the-shelf applications including word processors,
databases, spreadsheets, financial, accounting,
manufacturing, CAD/CAM, presentation, contact
management, vertical applications, and other business
software. Included are expenses for development tools.
Software fees are expensed.
|
|
Utility
Software
|
The
annual capital expenditures on new and upgraded software
used to help manage the desktops or network including
network and systems management software, security, virus
protection, backup and restore, disk optimization,
performance tuning, screen savers, and other helpful
tools. Also included in utility software are programming
languages, program components, modeling software, test
tools, configuration control programs, and documentation
tools.
|
|
Connectivity
and Communication Software
|
The
annual capital expenditures on new and upgraded software
used to connect users and to enable sharing of
information across the network, beyond what is included
in the operating system. Such software includes
messaging software and remote connectivity software.
|
|
Monthly
Costs
|
Monthly
capital and lease expenses for hardware, software, and
supplies
|
|
Leased
asset fees
|
The
annualized lease fees for all assets including hardware
such as servers, clients, printers, hubs, bridges,
routers, and switches, as well as leased software.
|
|
Other
monthly costs
|
The
annualized capital fees for computer supplies such as
diskettes, CD-ROMs, backup tapes, toner cartridges and
other expendables.
|
Management
Management
is the IS direct labor expenses and outsourced fees of managing
the network, computer systems, applications, and storage
infrastructure, as well as managing the users ability to access
these resources. The successful management of the infrastructure
forms the basis for a solid business computing platform.
Management expenses are derived from the labor expenses of
network and desktop administrators, as well as network
management outsourcing fees. Expenses are the annual labor fees
(headcount performing the task * rate) for the analysis year.
|
Cost
Sub-Category
|
Definition
|
|
Network
Management
|
The
annual labor expenses for maintaining and optimizing
availability of key network resources to users. These
resources include access to the systems, network,
communications, information management and sharing, as
well as printing. Tasks in this category include
advanced support services, optimization, and
administration.
|
|
Troubleshooting
and repair (Tier III support)
|
The
annual labor expenses for technicians and administrators
in identifying and resolving failure, fault, and
accessibility support issues with the network,
computers, operating systems and applications.
Includes break-fix labor expenses.
|
|
Traffic
management and planning
|
The
annual labor expenses for pro-actively monitoring,
interpreting, planning and balancing the load placed on
the network infrastructure.
|
|
Performance
tuning
|
The
annual labor expenses for pro-actively monitoring,
interpreting, planning and balancing the performance of
networked systems and applications.
|
|
User
administration (adds, moves, and changes to users)
|
The
annual labor expenses for controlling user accessibility
and restriction to network and application resources.
Tasks include adding new users and resources, moving
users to new groups, or changing user profiles.
|
|
Operating
system support
|
The
annual labor expended in managing the operating system
including settings, drivers, and licensing.
|
|
Maintenance
labor
|
The
annual labor expended for routine tasks that are
performed on a scheduled or interval basis to maintain
accessibility and performance. This can include tasks
such as routine cycling of applications, maintaining
expired passwords, and deletion of e-mail logs. File and
disk maintenance is not included.
|
|
Tier
II support labor
|
The
annual labor expenses for resolving issues with systems,
networks, and applications that could not be resolved by
help desk tier I personnel, and are not yet ready to be
escalated to Tier III support personnel. The Tier II
resources are utilized when calls cannot be resolved
through standard solutions, require a greater in-depth
knowledge of the systems, or require dispatch to the
desktop or problem causing asset.
|
|
Systems
Management
|
The
annual labor expenses for managing the physical computer
systems, applications, and network. Tasks include
evaluation, deployment, and on-going management.
|
|
Systems
research and planning
|
The
annual labor expenses for identifying infrastructure
needs, reviewing configurations, setting standards,
researching options, as well as identifying and
documenting planned changes. Expenditures are for
servers, clients, networks, and off-the-shelf
applications.
|
|
Evaluation
and purchase
|
The
annual labor expenses for testing servers, clients,
networks, applications, and systems prior to rollout,
and the direct IS labor associated in supporting
procurement efforts, including the support of legal and
purchasing departments.
|
|
Software
licensing and distribution
|
The
annual labor expenses for deploying new software,
updating and upgrading existing applications and
operating systems, monitoring usage and the metering of
available licenses
|
|
Asset
management
|
The
annual labor expenses for inventories, asset
identification and tracking, asset database management,
change recording, and reconciliation, as well as
managing automated asset management systems.
|
|
Application
management
|
The
annual labor expenses for on-going management of
applications including configuration control, access
management, and launch.
|
|
Security
and virus protection
|
The
annual labor expenses for detecting or preventing
security violations or virus infection, and the recovery
from such violations or intrusions.
|
|
Hardware
Configuration/Re-configuration (adds, moves, changes to
assets)
|
The
annual labor expenses for re-configuring existing
solutions within the network including adding
sub-components, upgrades, physical moves or
configuration changes. Items include system upgrades,
performance enhancements, topology changes, switched
network changes, asset location, and other physical or
logical changes and setups to the hardware and settings.
Software upgrades to applications and operating systems
are not accounted for here, instead they are recorded in
Software licensing and distribution.
|
|
Hardware
Installation
|
The
annual labor expenses for installing and deploying new
hardware including servers, clients, peripherals,
communication devices, and networks.
As part of the installation, it is assumed that the
replaced assets are disposed of using labor accounted
for in this category.
|
|
Storage
Management
|
The
annual labor expenses for managing the desktop and
network data and storage including file system
organization, database management, local hard disks,
server hard disks, centralized on-line storage devices,
optical storage, hierarchical storage management
systems, archiving and backup/restore systems.
Only client/server storage management costs should be
considered.
|
|
Disk
and file management
|
The
annual labor expenses for optimizing hard disk storage
and file systems. Expenses include management of
directory trees, disk de-fragmentation, and disk
maintenance.
|
|
Storage
capacity planning
|
The
annual labor expenses for monitoring, managing, and
optimizing on-line and off-line storage.
|
|
Data
access management
|
The
annual labor expenses for providing user availability to
information including in-scope database management, file
access, and remote server access.
|
|
Backup
and archiving
|
The
annual labor expenses for the backup of network and
desktop data, restoring lost files or disks, and the
archiving of data to tape.
|
|
Disaster
planning and recovery
|
The
annual labor expenses for building disaster preparedness
plans including backup and restore procedures, tape
management plans, hot-site planning and preparation,
record keeping, and team organization
|
|
Repository
management
|
The
allocated annual labor expenses for managing the central
disk or tape repository.
|
|
Outsourced
Management Fees
|
The
annual fees associated with outsourcing any of the
Management labor costs. The outsourced categories
typically include planning, installation (migration
rollouts), Tier II support, inventory, asset management,
repository management.
|
Support
Support
costs are the direct labor expenses (IS, end-user, and
procurement) and fees associated with supporting the network
infrastructure and users. Labor and fees include help desk
support (tier I), maintenance and support contracts, training,
travel, purchasing, vendor management, and management overhead.
Support costs are annual labor expenses and fees for the year
the analysis was performed.
|
Cost
Sub-Category
|
Definition
|
|
Operations
Labor
|
The
annual expenses for the overhead labor associated with
running a computer and network infrastructure.
|
|
Administration
|
The
annual labor expenses for clerks and assistants that
support administrative staff, support staff, IS
department and general managers, as well as IS
executives.
|
|
Management
|
The
annual labor expenses for IS department, general, and
executive management.
|
|
Casual
Learning (IT)
|
The
annual labor expenses by IS professionals outside of
formal training programs to learn computer, network, and
storage systems, as well as IS and end-user
applications.
|
|
Vendor
Management
|
The
annual labor expenses for working with and managing
hardware and software vendors.
|
|
Mis-diagnosis
|
The
annual IS labor expenses for IS resources spending
support time on issues that were user error, not real
faults.
|
|
Training
Course Development
|
| |