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Opinion: Total cost of ownership is back on the corporate agenda

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8th Dec 2008
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IT spendingMarket research firm Datamonitor recent predicted that a majority of UK businesses are planning to trim their IT budgets in 2009. Anwen Robinson discusses the implications and argues that total cost of ownership (TCO) calculations provide a clearer guide to long-term IT management.

Total cost of ownership (TCO) became a popular IT management acronym during the early 1990s recession, and the 21st century credit crunch is giving it a new lease of life as organisations re-evaluate their IT spending patterns.

Research company Datamonitor reports that 52% of buinesses plan on cutting or freezing their IT budgets next year. Buying decisions will be more rigorously debated and the need to achieve value for money will be paramount - which is where TCO comes into the equation.

TCO is measured from the cost of purchase and implementation through to the projected costs of change to the system. Maintenance and support costs play as important part in TCO as software fees, so TCO will be higher for systems that cannot be managed in-house as they will require high external maintenance costs to cope with on-going change.

The first response of many finance directors facing the need to reduce overheads is to look for straightfoward cost-cuts, but embracing TCO can lead to a longer-term approach to cost management, through restructuring the cost base to make departments more efficient without cutting corners.

This is not an easy route, as it will probably demand new internal processes and shifts in IT and software thinking, but it should be more rewarding for businesses. Long-term cost management introduces accountability and aligns departmental objectives with the goals of the company. It can help get everyone pulling in the same direction using processes and measures to ensure sustainability and avoid waste.

FDs and IT managers need to get close to the ground and engage with IT buying staff to ensure they look for hidden costs in maintenance and support and - above all - to consider the costs of change. These issues can be difficult to foresee, but most businesses go through change at some point.

Many organisations encounter the need for internal changes through mergers, acquisitions, new products, new management, reorganisations, outsourcing and many other circumstances - but their software won't allow them to. So they get caught up in a continuous need-spend-need-spend cycle, where they have to wrestle with multiple legacy business processes and systems.

CIOs will often justify this scenario to finance on the grounds of continuity, as change is always expensive. Their agument is that the organisation will need to maintain its investment in supplier X because the software has already been deployed - in effect, "better the devil you know than the one you don't".

This is dangerous thinking. If supplier X has a high cost of ownership, why persist? There are plenty of open-ended options around that can work alongside legacy IT systems.

Rather than looking to cut IT budgets, FDs should re-evaluate their technology purchasing process to get more out of them. Question the long term benefits of purchases and ensure you have a good idea of the total cost of ownership of the systems and software before you open the cheque book. Finance and technology managers need to work more closely together to ensure technology purchases align with business objectives. Then perhaps we will see fewer research reports about IT budget cuts and more businesses emerging from the downturn in a stronger, more competitive state.

Anwen Robinson is a director with ERP software company Agresso. A longer version of this article appears on our sister site, Finance Week.
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