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Is True TCO Important?

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The answer to the first question, apparently, is most of the time.

Total is a very ambitious target. It is very difficult to capture all costs when projecting or comparing -- whether it is for actual proposals in hand or for a general business case. Each unknown variable will impact the accuracy, and at some point the analysis must focus on the cost categories that "move the needle." But labeling a selective life-cycle cost analysis as a "Total Cost of Ownership" is misleading.

A couple of years ago an independent research firm published a report on the TCO for UC. As part of the report description, they identified seven upfront cost categories (Capex) and 21 ongoing cost categories (Opex). However, the same report preamble stated they only looked at five of the upfront cost factors and only seven of the ongoing cost factors. At least they were clear on what was included.

As part of a presentation I gave last summer, I identified nine additional upfront cost categories, many of which will vary based on the solution selected and the overall design (on-premises, cloud, or hybrid). Thus, the published TCO study only covered five of 16 capex variables.

Ongoing costs are a bigger problem, and the report emphasized that recurring costs were becoming even more important. It concluded that companies that ignored ongoing costs may incur significant unexpected costs over the life of the system. This is true, but in addition to the study covering only one-third of the cost categories they acknowledged, my presentation from last year added four more categories.

If a client's TCO analysis needs to compare cloud to on-premises options, it is also necessary to ask about the setup (Capex) and monthly fees (Opex) of several items that are normally included with the on-premises systems. These fees may include usage-based items (such as the number of times an IVR handles a call) along with a dozen potential "extras" to enhance the basic cloud offering, especially with an advanced contact center.

I have listened to countless presentations on the TCO benefits of various solutions, often hearing about the cost advantages with a specific vendor's solution. Based on how they calculate it, anyway. TCO also seems to be a debate between cloud vendors and premises-based vendors, since both claim costs clearly favor them. This is usually due to the cost elements included (or excluded) in the analysis and the assumptions made for many of the cost categories. The biggest difference in various life-cycle cost analysis calculations consistently shows up in the on-going costs.

Of course, with any published TCO study, it helps to understand what was included, but the best ones at least identify what is covered and the source of the information. If the report is on completed projects as reported via structured customer input (such as the Nemertes' cost study mentioned on No Jitter in March), at least it does not rely upon self-serving projections for future variable costs.

A quick cautionary note -- if a cost projection study was sponsored by a vendor, there may have been some influence on the categories to include. A truly independent study may not include all items, but at least it was not deliberately structured to favor certain factors.

Although costs are always important, most organizations understand that an excellent solution with a higher TCO is far better than a cheaper choice that is a poor fit. The actual decision is based more on a cost\benefit analysis (CBA) than purely costs. And just as costs can be elusive to accurately determine in advance, so, too, are the benefits. Some benefits will produce a financial gain, but many others will have a "soft dollar" effect. Not every client can calculate the impact of improved customer satisfaction or better productivity, but they can carry a strong influence on the decision.

Thus, some type of TCO is important for the cost side of a CBA, but by itself TCO is rarely the primary decision factor. This will be even more the case if the new solution is producing significant change, such as when implementing communications-enabled business processes (CEBP). In such situations, an accurate estimate of the financial benefits is at least as important as the determination of costs.

Just as importantly, most decisions are not rendered on the basis of the pure mathematics of the lowest TCO or even the most favorable CBA numbers. More so than ever before, clients are inclined to use risk, previous experiences, references, and the level of confidence in the vendor as primary factors. And you still can't eliminate the personal preferences that often surface during the buying process. It is easy to spot in our personal life choices; anyone who thinks all business decisions are made without similar emotional influences is naive.

Evidence of the relative importance of TCO, or more likely a simpler life-cycle cost, during a competitive procurement process can be seen by the amount of emphasis (percentage of total points) assigned to costs in a weighted evaluation. Even our public sector clients, tasked with being custodians of public funds, are loathe to put more than 15 to 20% of the total decision weight into the cost category. A cost analysis is still included, but in many cases, the evaluation team first narrows the submissions based on all other factors before the costs are even revealed or discussed. The universal belief is that the right choice is far more important than the cost savings of a bad choice.

Is it critical that a TCO may not be a true "total" cost calculation? Not necessarily, but the items included in the cost analysis should cover enough of the variables to ensure informed decisions and prevent big (post-choice) surprises.

"SCTC Perspectives" is written by members of the Society of Communications Technology Consultants, an international organization of independent information and communication technology professionals serving clients in all business sectors and government worldwide.

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