Say you’re in the market for a used BMW 1-series coupe, one of the best-selling used BMWs on the market. If you’re financially savvy, you will know that there are more costs related to owning an automobile beyond the upfront sticker price ($22,962 per edmunds.com), including: depreciation, interest on financing, taxes, and fees, insurance premiums, fuel, maintenance, and repairs. The total cost of ownership – what you should expect to spend on all of those costs over the entire time that you own the car – will likely be a critical factor in your purchase decision.
If you plan to own that BMW for five years and expect to drive 15,000 miles each year, your projected total cost of ownership (TCO) will be $49,519 or 66 cents per mile. Compare that to the TCO of a 2016 Ford Focus at 40 cents per mile, and you have a simple way to make a financial decision about your next car purchase. (Unfortunately, it doesn’t help with the part of you that just really wants to drive the BMW.)
Using Total Cost of Ownership (TCO) to Improve Business Efficiency
The total cost of ownership is a concept that is used for decision-making about IT systems as well, as companies strive to create greater business efficiency by managing manual processes using technology systems. But what if implementing systems actually creates more work and less efficiency? For every IT system, there are potential hidden costs that may not get factored in when estimating TCO. It is critical to understand whether the total cost of ownership will be higher than your return on investment, or not.
How can you confidently consider TCO vs. ROI for any particular system? The key is to explore the trio of business efficiency: people, processes, and technology.
If you integrate a specific system into your business, what impact will it have on your employees? To accurately understand the system’s efficiency related to people, consider the people costs related to each of the following roles:
- Who will manage the system?
- Who will use the system?
- How will you pay for the system (including setting up suppliers)?
- Who will support the system?
Will the system require you to hire additional staff, or will it enable you to operate with fewer employees? Will some people need additional training or new skills to use the system?
For processes to be truly efficient, it’s critical that they integrate with other systems. Why make one activity or task efficient, if it creates a manual effort somewhere else? Integrating multiple systems can increase complexity and may reduce efficiency. Have you considered how all related systems will work together, and what processes must be put in place to coordinate those integrations? There also may be unexpected development costs to enable multiple systems to work together.
To track how well a system is working, and whether it is contributing to improved efficiency the way you expect, you may require systems reporting. Additional tools may need to be obtained or developed to report on systems activity.
In a perfect world, we all would want a single system that can do everything. However this usually isn’t achievable, so instead, we can examine the range of systems in use and identify where sources of efficiency can be unlocked. You can begin by reviewing the total cost of ownership, factoring in all the above costs, and leveraging this trio of business efficiency to help you identify waste versus growth.
Considering whether to build or buy your next IT system? Learn more about the pros and cons of each scenario with, “Build vs. Buy: An Insider’s View”.