Why Total Cost of Ownership should be the driving force behind your technology investments

Why Total Cost of Ownership should be the driving force behind your technology investments

As a business owner, not only is it critical for you to invest in technology for business growth, it is also critical to understand what the real cost of implementing the technology solution of your choice will be, and how to avoid solutions that are not only expensive but also ineffective. 

It is but natural that cost is often one of the first things business owners think of while considering technology upgrades, which makes it important to evaluate the Total Cost of Ownership (TCO) of any technology decision. Total cost of ownership is the sum of all costs and expenses in anyway related to purchase, implementation, and management of technology solutions for your business. Take a simple case in point – if a business owner wishes to upgrade part of their technology stack, the decision cannot be made in isolation or hidden costs could accumulate over time. The decision would involve evaluation of the different solutions, their fit with the current needs and the legacy technology infrastructure, lifecycle of each solution, warranty, purchase and implementation costs, training of personnel, as well as the opportunity cost of any downtime and other productivity losses.

Why is TCO important for your business?

The element of TCO is important because it determines your business’s Return on Investment (ROI). It is critical to understand how much the technology that you have invested in is going to cost you over time, as it helps you make better buying decisions. It is a good framework to use to analyze your business’s IT investments.

What to look for while analyzing TCO

While evaluating the TCO of technology for your business (purchasing and implementing hardware/software) you should take three main elements into consideration:

  • Acquisition cost – The acquisition cost of a technology solution includes cost of software, hardware and implementation for your new system for your business. The implementation would typically include configuration and customization of the new technology, integration with existing systems, data migration from legacy systems, and user training.
  • Management–Management of a technology solution would include software maintenance cost for on premise licenses, hosting costs, recurring costs for cloud solutions, and support costs on an as-needed basis.  For solutions such as ERP, it is not unusual to have support contracts with a technology vendor.
  • Opportunity cost – The opportunity cost of technology includes the cost of the downtime of your chosen solution such as productivity loss, as well as cost of any stand-in or replacement solution.  The opportunity cost of the status quo of not making a technology decision should also be considered in terms of the associated benefits that are being forsaken.

Though there are various elements that go together while considering TCO for your business, it is important to understand the various available options to make the best buying decision.There are pros and cons for every option, and the choice based on functionality and value depends on you.

Comparing TCO of cloud-based with on-premises infrastructure

The TCO calculation has evolved in recent years with the increasing acceptance of cloud solutions as an option.  Leveraging the cloud options often makes a new technology purchase more digestible with the capex associated with traditional technology purchases becoming an opex with cloud solutions, thereby lowering the initial cost of acquiring new technology.  For 80% CIOs, migrating to cloud technology is the best option for innovative business development as cloud brings more than just stability, flexibility and efficiency; it generates savings of up to 20% as compared to on-premise technology.[1] Cloud solutions tend to be easily scalable, are secure to set up and usually require less technical support.

Minimizing the TCO for your business

TCO should be considered for every new investment that you make on behalf of your business. Here are some points you may want to keep in mind while you review your TCO:

  • What are the benefits of your preferred technology and how does it compare to the cost?
  • What are the infrastructure requirements, and will the new solution fit with your legacy infrastructure?
  • Should you take on the application subscription or license costs?
  • How does the application design, configuration, and implementation process compare to other solutions in the market?
  • How easy or difficult is the ongoing administration and maintenance and what are the costs involved?
  • Will it be easy to upgrade your team’s skills and what are the related training costs?
  • Will it be possible to scale the solution as your business grows?
  • What is the cost of not making the technology investment?

With increasing competition and processes complexities, understanding the TCO of your technology decision, whether it be acquiring new technology, as compared to the cost of doing nothing, has become more important than ever today!