Death to TCO! Put this useless metric to bed

Consultant Patrick Gray talks about the big inherent risks to basing your IT shop on TCO or its variants: Capturing intangible value and the "who cares" factor.

In its zeal to appear financially rigorous, IT has adopted a variety of financial metrics in an attempt to get away from the tech-oriented standbys like uptime, capacity and utilization. When used to analyze IT investments like any other corporate investment, this is a fine approach, but when used carelessly or superficially, metrics like total cost of ownership (TCO) result. While this metric was seemingly discredited over the past few years, it is making a comeback.

Software and methodology peddlers like TCO-type metrics since they require unwieldy databases and applications to track and analyze costs, which make up a cornerstone of many company's IT management suites. CIOs like them since it gives a veneer of financial rigor to all the boxes and wires in the data center; It's the classic case of "Hey, let's track all these metrics because we can" rather than making difficult analytical and managerial discussions on whether a metric is actually appropriate or not.

At the end of the day, it's much easier to tally up that invoice from Dell and EMC than to work with the COO to determine if that CRM system is really responsible for the uptick in sales.

TCO and its variants suggest that a company look at its IT investments in terms of their "total" cost, which would include the initial acquisition cost, ongoing maintenance, and periodic upgrades and fixes. The new generation of TCO advocates even suggests marrying this information to transactional volumes, proudly showing demonstrations where the cost of a single e-mail can be calculated down to fractions of a penny, tallying the cost of the variety of servers, networks and software that allowed the latest Nigerian scam e-mail to rapidly appear in the CFO's inbox.

This may all seem well and good, until you see the big inherent risks to basing your IT shop on TCO or its variants: capturing intangible value and the "who cares" factor.

Are you a Ferrari or a Kia?
The first problem with TCO is that it fails to capture intangible value. Microsoft ran an ad campaign several years ago touting the TCO savings between running its software versus a free Linux variant on the desktop. Microsoft's contention was that while the open source software was free to acquire, things like support and maintenance ended up costing more in the long run.

Without debating Microsoft's conclusions, TCO failed to factor in the handful of factors that make Microsoft’s products so dominant on the corporate desktop: their ubiquity and establishment as a corporate standard. TCO doesn't sell Windows, the fact that your CEO would kick you to the curb if he or she couldn't find Outlook and MS Word likely does. How do you assign a cost to this fact?

To use an analogy, a Ferrari has a massive TCO disadvantage compared to a Kia. Yet, if you have the financial means, most people would choose the Ferrari over the Kia. They both do the same job of taking you from point A to point B, and the Kia is the TCO winner hands down, but TCO has failed to capture the intangible value that comes from a Ferrari.

Focusing on TCO biases you towards the Kia end of the spectrum and like life, there are times where the intangible benefits of the Ferrari outweigh the TCO disadvantage. If you're going to play the corporate strategy game, you best appear to be a Ferrari!

The "Who Cares" factor
I recently sat through a demonstration of a vendor's IT "management" suite, the showpiece of which was their cost management application. As the demo came to a crescendo, the presenter clicked through a variety of screens until he said with aplomb "And that is our cost to receive a single e-mail!" The vendor then claimed you could tie the ROI for that single e-mail and make a "compelling case for IT's value".

First of all, I have yet to meet a CEO or CFO that demanded or cared about the "ROI" of each e-mail, and would actually believe a number presented as such (to four decimal places no less). I might receive one e-mail awarding a six figure contract, and the next providing the latest off-color political joke. Obviously the two e-mail messages have wildly differing values, and even if I could track the cost of every e-mail against its benefit, who cares?

For CIOs who struggle to make a compelling case for the strategic benefit of IT, counting pennies to the point that you can rattle off what barely passes as useless trivia makes absolutely no sense.

Infrastructure is comfortable to many vendors and unfortunately many CIOs, and it's an easy place to tally up numbers and do some division, draw a fancy graph and pretend you're actually managing corporate IT as a strategic investment.

Just as no CFO would compare the TCO of one office chair to another, or attempt to calculate the ROI of that chair based on what kind of deals were made by the derriere occupying it at the time, nor should CIOs fall victim to these misguided attempts to bring what amounts to faux financial rigor to IT.

Patrick Gray is the founder and president of Prevoyance Group, and author of Breakthrough IT: Supercharging Organizational Value through Technology. Prevoyance Group provides strategic IT consulting services to Fortune 500 and 1000 companies. This article was first published as a blog post on TechRepublic.com

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