Calculating TCO properly is vital: analyst firm

Gartner says correctly estimating total cost of ownership can bring benefits

When calculating total cost of ownership, the price paid to vendors for IT products is just the tip of the iceberg.

Per-user TCO is about 4.5 times higher than the actual price of hardware and software in typical scenarios, when factoring in users who provide informal IT support, administration, downtime and operation costs.

That’s according to research published last year by Gartner.

TCO is a mix of direct and indirect costs, related to both assets and tasks. Nearly half of a typical TCO is from users who perform informal technical support, perhaps due to an IT staff shortfall, Gartner states in another report, issued in February.

Gartner says these “end-user operation costs” tend to be hidden, unbudgeted and poorly accounted for. But labour costs can be reduced by making strategic investments in operations assets, such as helpdesk automation, systems management tools and updated operating systems.

A thorough analysis of these factors can help an IT department build the business case for new products and upgrades.

“Infrastructure and operations funding is hard to justify and obtain. The dynamics of TCO can dramatically improve the business case for such investments when indirect costs are considered,” Gartner’s Lars Mieritz and Bill Kirwin wrote in the report. “As complexity and labour costs go up, service levels suffer, particularly if there is a lack of capital investment.”

Gartner defines TCO as the “holistic view of costs across enterprise boundaries over time”. The definition has changed over the years to include non-IT costs that can be related to IT, such as human resources and facilities.

“Think of TCO as a matrix of nouns and verbs. Nouns are the assets, like hardware and software. Verbs are things that need to be done to keep the assets running,” Gartner states. “To execute a TCO analysis, each IT asset (noun) is loaded with corresponding labour costs for administration, support and contract fees (verb).”

The first part of the equation is the capital investment in hardware and software.

A PC running Windows XP might cost US$2,100 (NZ$2,896.52) and last three years, thus costing US$700 per year.

But labour cost is the largest portion of TCO, and the most manageable, Gartner says. If you have 100 servers that have to be rebooted 100 times each per year, and it takes half an hour to reboot, the labour costs wasted on this task could equal 35% of a full-time employee’s salary, according to Gartner’s analysis. Capital investments that make the rebooting process automatic and transparent greatly reduce this cost.

Indirect costs balloon when users perform IT operation tasks, such as peer support, formal and informal learning, and local data and file management, Gartner says.

Recognising that users are sometimes forced to perform IT tasks might provide fuel for an argument that the IT staff should be expanded.

“The undocumented headcount in user operations is an opportunity to increase IT operations headcount to reduce the workload of end-user IT operations,” Gartner writes.

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