Looking beyond TCO

Looking beyond TCO

TCO isn't the only means of measuring business value. Some Indian CIOs have devised their own methods to do it, says Srikanth R P

TCO is a fair method of measuring the value of IT investments. Many CIOs would agree with this statement as there is no other foolproof method that helps IT decision-makers choose products. TCO brings out valid IT-related costs which are overlooked during product acquisition. For instance, Gartner estimates that the cost of a PC over its lifetime can be more than five times its cost of acquisition. Details like these change the dynamics of purchasing software, and consequently the concept of TCO has become popular.

An important fact has been overlooked in all this. Many CIOs simply forget to measure the business value of their IT investments. (We are talking about the business growth that IT investments can deliver.) For example, by letting companies track customer behaviour, a good CRM system can help them introduce a new product in the market that may command higher margins. In such a case, the incremental revenue gains and cost savings through business process improvements can be far greater than costs incurred in purchase and maintenance. Oftentimes CIOs do not take business value into account while making IT investments.

Doubts about TCO

TCO is just one measure of the value IT creates. It is more important to measure the overall impact that a solution will have Arun GuptaCIOPfizer

So the question becomes ‘Is TCO a fair method of choosing a product or making an IT investment decision?’ While most organisations base their IT decisions on TCO, some Indian CIOs have gone beyond the hype and developed their own models for measuring business value. Take the example of pharmaceuticals major Pfizer, which does not base its IT investments solely upon TCO.

Says Arun Gupta, the company’s CIO, Pfizer, “TCO is just one measure of the value IT investments create. It is far more important to measure the overall impact that a solution will have on an organisation. This is the reason we have created our own model for evaluating IT investments.” Pfizer currently measures IT investments using a formal process called Benefits Realisation Matrix (BRM), which is agreed upon by the business heads and the technology team. BRM is done before commencing work on any project. This methodology captures three different aspects of each project: new or improved business capability, financial benefits (topline or bottomline) and intangible benefits. All these aspects have a realisation date and a key person for monitoring and measuring business value. Pfizer uses this model to measure the value of IT investments instead of the traditional TCO model. The company also asks vendors to benchmark their products against its BRM model to gauge the kind of impact a particular technology or product will have on the company. Going further, the company sometimes links vendor payments to the realisation of promised deliverables.

Although the TCO model is not flawed, organisations need to look beyond it. While the model is a useful concept for evaluating and selecting technology products as it factors in the future cost of maintenance, operation and support, it also needs to be looked at in the context of different countries. For example, the cost of support in India is several times lower than it is in the west.
Explains Varun Jha, CIO, Tata Steel, “One needs to use published data on TCO with care. Such data is generally based on cost structures that are applicable in developed countries where the cost of manpower is higher. Thus, their published data on TCO tends to overstate the cost of the services component and understate the cost of products, which may skew the decision in favour of higher-priced products.” There are no Indian models of TCO for reference. Therefore CIOs have to build their own models based upon their experiences. Currently, Tata Steel uses the concept of TCO to choose IT systems, but the company also seeks to measure the value of business change enabled by an IT investment. The important thing to note is that the company seeks to measure the value generated by an IT investment. As Jha says, “The objective of introducing any business change is to improve some aspect of business performance. Improvements in key performance indicators can be translated in most cases. Even the non-financial key performance indicators—such as employee satisfaction—can be quantified.”
Hence, if you choose a product simply because it is cheaper to maintain and operate without measuring the business value that it can create, it may deprive the organisation of the very benefits the product was selected to provide. Says Zoeb Adenwala, CIO, Pidilite, “Evaluating products based on TCO can be misleading. One has to look beyond the vendor’s claims to judge products.” However, he is quick to add that in some cases the concept of TCO can be used for choosing products. For example, if you’re buying IP phones for routing your calls using VoIP, it can be a simple case of comparing your current communication costs with the cost of acquisition and the period for recovering your investment.

Beyond the spiel

The TCO model needs to be studied specifically when a vendor introduces a new product and says that the customer organisation can derive a lower TCO if it upgrades to the new version. Says Eruch Batliwala, head of IT, Tata Power, “We feel that the TCO model is a biased way of looking at facts as vendors tend to downplay many important factors. For instance, many ERP vendors typically ask their clients to upgrade to the latest version promising lower TCO. But if your organisation has fine tuned its processes and the business value your organisation would derive is far less, then there is no reason for an organisation to go in for an upgrade.” Though nascent, the trend to look beyond TCO is gaining ground among Indian organisations. For instance, one solution for Pfizer’s sales force links revenue growth to sales personnel activity.
Bajaj Auto uses the TCO concept for planning investments and not necessarily for choosing products. Explains Anil Khopkar, CIO of the company, “TCO is not the first criterion. We look for functional fitness, process improvement and best practices. Secondly, we look to achieve business benefits. We do not believe that the lowest TCO product will provide us with the best value. Some solutions we selected had significantly higher TCO over other solutions.” Bajaj is using this concept in some of its projects. For example, in the warehouse management system, TCO is measured from the perspective of overall project cost. Bajaj has also set objectives for the warehouse; it plans to improve service levels from the current 85 percent to 99 percent in addition to eliminating packing errors. Pidilite too does not depend on the concept of TCO, but uses indicators such as reduction in inventory, reduction in errors and lesser stock-outs to gauge the value of its IT investments.

Quantifying investments

Taking the stand that CIOs should look at business value rather than TCO, the next question that arises is whether IT investments can always be quantified.
Says Gupta of Pfizer, “With the exception of some IT infrastructure projects, all other IT investments can be quantified. To give an example, setting up a LAN or desktop acquisition may not provide a good vehicle to measure the impact of IT. However, the implementation of any technology-based solution can definitely be quantified. If a project does not have a business impact, there is no compulsion for an organisation to do it. It should also be measured against another parameter—‘What will be the impact of not implementing this particular solution?’”
Thus, while the business value method may look attractive, it is not always possible to judge if a technology decision will provide business value for sure. Says Khopkar, “In the case of business development projects, we do not measure the value of IT investments directly as there is no way of really quantifying these values.” For instance, can we say that sales will increase five percent due to a CRM implementation? That’s hard to say. What can be ensured is that the specific improvements required in current business operations can be defined, and then we can ask whether IT initiatives will improve matters. If the answer is yes, then the investments are justified.

A TCO model may be one of the parameters employed in choosing a product, but it should not be the only reason for making a decision. It’s time Indian CIOs look at measuring the full business value instead of only the TCO.