Traditionally, companies have used tools like total cost of ownership (TCO) and return on investment (ROI) calculations to determine whether they should invest in their IT infrastructure. But buying technology based simply on price can be a costly mistake in the long-term. Rather, companies should evaluate the cost-efficiency and cost-effectiveness of their purchases. Let me explain.
Cost-effectiveness is measured by the value derived for each rand spent on a solution. Cost-efficiency is measured by the return over the long run on each rand spent. Together, these two measures form an extension of TCO and ROI.
ROI is typically viewed as the time it takes for enough cost savings to be derived from the new infrastructure to cover its costs. TCO, in contrast, is a calculation that generates total cost of owning the system per user environment. The problem is that ROI and TCO models look at the costs associated with technology without necessarily quantifying the business value a solution can drive in an organisation.
TCO models are typically used to compare the costs of different vendors` systems. But what customers often overlook is that there is more to an IT system than simply the initial purchase price of the technology. What Long-term business value does the solution bring?
How will it make people more productive and the business more agile in future? It is not uncommon for companies to spend millions on defining the scope and reach of a solution, only to then attempt to cut hundreds of thousands off the initial purchase price of the solution in an effort to reduce TCO. In the process, though, they undermine the efficiency and effectiveness of the technology, and therefore reduce the overall cost-efficiency and cost-effectiveness of the solution.
Another problem with TCO and ROI calculations is that one size simply does not fit all. Our experience has shown that each company has its own peculiar IT culture, infrastructure and methodologies. There is no such thing as a corporate standard across the board - each company follows it own blueprint. This means that using most standardised TCO and ROI models is fairly shortsighted.
Having said that, TCO and ROI calculations can be useful tools for helping to build a business case for deploying one solution or another. Generally, TCO studies help to determine architectural strategies, followed by ROI calculations to determine the financial viability of the solution. Sadly, in my view, few companies then take the next step of asking whether the solution is cost-efficient and cost-effective.
At Citrix, if we hear prospective customers say that our software is an expensive solution, we ask, compared to what? What are your options? Are other options as cost-efficient? Products from a range of different vendors may not integrate with one another, and the environment may not work in your technical landscape - this will ultimately affect the cost-efficiency of your IT environment.
The ideal is to have a solution that is as cost-efficient as possible, but the ends must justify the means. Companies cut costs to afford a solution, and when it does not work, they wonder why. It isn`t always the technology`s fault. If systems are planned properly, the deployed solution will be cost-effective. This means the company has spent the right money in the right places and, ultimately, it becomes a cost-efficient solution.
The bottom line is this: don`t make decisions based simply on financial numbers. Rather, solve the business issue by including cost-effectiveness and cost-efficiency in your deliberations.
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