Dollars and Sense?

How TCO is a common sense sales and marketing Tool for Today’s Chaotic Economy

By Bill Kirwin, original father of TCO analysis with Gartner

As the credit crisis continues, organizations have been forced to tighten funding allocations in preparation for a long economic winter. IT budgets for 2009 are contracting even further from the modest forecasts for 2008, which are being trimmed even as this is being written.  For IT budget holders, triage is a critical component of determining how funding is going to be allocated for infrastructure, productivity and enterprise applications. Cold, hard decisions are being made on where to trim personnel, hardware and software spending. Never has cost-analysis been so critical for technology users to justify spending and for technology providers to prove the business case in order to assure that the proposed solutions are a priority and make the budget cut.

As the economy weakens, Total Cost of Ownership (TCO) will be a critical influence as to how spending decisions are made.

For those new to this metric, TCO is a well-established standard methodology used to examine computing costs, TCO is defined as a holistic view of enterprise costs and specific solutions over time. It seeks to expose the “hidden costs” of spending decisions and operations so that real reductions in cost can be realized. First developed in 1986 to analyze the cost of competing PC platforms, TCO’s influence has been extended to virtually all technologies. Today, it is a mature, widely accepted practice in both helping buyers analyze ways to reduce costs, and for vendors to make the case for change, or prove competitive advantage.

As economic buyers decide where to make spending cuts, these decisions need to be taken with a complete awareness of the entire cost of those actions. Quite often arbitrary cost-cutting leads to inflated costs in the IT ecology. For example, freezing the CAPEX spending on server upgrades can result in higher on-going OPEX costs for energy consumption, maintenance, support issues and downtime. TCO is vital for analyzing these decisions in that it takes all of these outcomes into account, so that decisions can be made within a holistic framework of cost actions and reactions.

Users of technology are facing significant operating costs to run enterprise applications with escalating demands for storage, network bandwidth and compute power, just as security risks, regulatory compliance and legal requirements are mandating new levels of oversight and transparency. Vendors of technology are competing not only with each other for new spending, but with the entrenched operating costs of the status quo. Bullet-proof business cases need to be made for any money to change hands. Competitive opportunities emerge for those that can present the best cost/benefit analysis, and TCO comparisons which can help create the case for why current solutions are more expensive and warrant replacement, or which competitive options will cost less over its lifecycle.

Most important for vendors is the chronic fact that the majority of buyers do not have the tools or knowledge in order to do the TCO analysis themselves. To be competitive in this tough economic environment, it is vital that that marketing arms sales professionals, consultants and channel partners with the automated tools in order to help buyers quantify TCO advantages.