Today I wanted to focus on the topic of ‘Basing decisions on evidence to drive continuous improvement’ and specifically draw your attention to the Total Cost of Ownership.
My biggest frustration over the years has been the ineptitude and lack of attention in business to fully understand how much things really cost from a technology perspective, and how a business case is built on a set of numbers based on a limited understanding of current usage and the state of technology used. In many cases, understanding the current costs of a service is limited to how much was spent on software or hardware and doesn’t account for the costs of staff, maintenance, and the share of the infrastructure used, including compute, storage, and networks. This often leads to over-inflated expectations of benefits, with savings and programmes of work that are underspecified and misunderstood. With the worst-case scenario being frustrated business users and a CFO or Finance director throwing up their hands in disbelief as technology costs continue to rise even after improvement projects have been completed. The promised wonderful savings and benefits were not delivered, and phase 2 was needed. Why is this? One answer is that the evidence used to create the business case was flawed and inaccurate as the basis for defining service improvement. TCO was not understood.
At CoStratify when we talk about and analyse the total cost of ownership (TCO) we base our thinking and calculations on the real ledger costs and what has (actually) been spent that is either capital ( one time spend) or Operational ( Opex/recurring spend). It is only when you sample this over at least 4 or 5 years that we see a trend and capture what we term the ‘run rate’. Run rate is really useful, as it gives an organisation the trajectory of future spend by looking back and then looking forward. For example, an organisation that has traditionally spent money on technology within a certain operating model, such as on-premises hosting, with a small amount of external support and local staff, will continue to spend approximately the same amount (adjusted for inflation) if they don’t change their strategy. We have tested this thinking over and over again, and it is true that history/legacy defines future state.
The strategy (if unchallenged) defines and renews the run rate and the existing spend commitment for the future. Therefore, organisations that do not understand their spend profile and how their IT spend is allocated across categories will continue on the same old journey and trajectory. Clients who have a handle on TCO, who apply this to usage scenarios, such as how much the delivery of a desktop costs for all users per year /per month, will be in a much better-informed position to break out of the existing run rate and have a successful desktop transformation project in terms of benefits and savings, compared to those who have no real TCO markers. For the latter, the financial benefits will not happen as they don’t understand the current IT in the context of their TCO. This becomes a big problem moving forward.
We see organisations that have an accurate handle on TCO being more agile and using the levers of spend-analysis categorisation to adapt and be more flexible. They would act knowing;
(a) how cost is accumulated in the delivery of a specific service (such as desktop)
(b) knowing where big buckets of cost sit.
In this modern digital transformation world, analysis of spend will be scrutinised and then scrutinised again and again. Knowing where your ‘big buckets’ of costs are is vital. We are starting to see more focus on fixed and variable cost analysis as well. Many businesses are looking at variable costs being the holy grail moving forward, allowing a cost base to be turned on or off at times of need. This will, in our opinion, get even more attention, as businesses won’t want to be locked into long-term, committed outsourcing relationships, for example, for services that need to change or flex in response to external factors.
Think of the scenario as an IT director, Head of Service, or similar. You are asked to achieve 20% savings and produce an answer within 2 weeks. Without TCO knowledge of where the costs sit in real terms for any part of your service, turning this work around for a CFO or finance director will be impossible. You would likely be forced to make decisions without evidence. Gathering this evidence, keeping it up to date, and then linking this back to your big bucket cost scenarios like data centre, telephony, or desktop will be critical and even more essential moving forward.
A good example of this recently was a client who really wanted to understand cost levers for change. Those scenarios where costs can be taken out without affecting output, and those that will. i.e. you’re not going to be able to reduce costs of a £3m managed service contract that’s been taken out over 5 years, but you might be able to reduce the cost of software as a service in business areas that are not mission- or business-critical. Switch it on or off when needed, for example.
At CoStratify, our evidence-based gathering approach allows TCO to be calculated, and if you are getting asked these questions in relation to savings and scrutiny around the cost of your service and you have not got a handle on your TCO, it would be great to have the conversation as to how we may be able to help.
We have seen lots of cost data from various organisations, and we have never failed to establish a TCO yet. We are therefore happy to take on this challenge! The next article in our series will pick up another point in our summary that is tightly linked to TCO. That is measuring the value of IT to the business and how that needs to be reflected in an adaptive strategy.
Thank you for taking the time to read this article in our series. Please do get in touch for any further information and where you feel we can help.
CoStratify – Forming strong evidence for change