Databus Issue: 2003 3 07/15/2003
Total Cost of Ownership or Total Cost of Value?
John C. Wilkinson, Ph.D Vice President, Marketing
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Total Cost of Ownership (TCO) is an interesting construct, but it deserves careful scrutiny. GartnerGroup estimates of the total cost of owning a PC at more than $40,000 over a five-year life span should raise questions. Gartner also estimated the TCO of a PDA (personal digital assistant such as Palm, iPAQ or Personal PC) at $3,000 annually. What is the basis for these numbers? And, what of the value of these devices as a function of their cost of ownership?
K-12 education organizations have a financial imperative to minimize TCO. Not minimizing TCO is tantamount to stating your district can afford to be sloppy in how it spends money. However, being highly cost effective – while necessary – can actually be counterproductive if producing savings takes precedence over producing value. In other words, if reducing the technology investment or buying low-cost technology (doing the right thing for the budget) outweighs acquiring what will truly enhance student achievement (doing things right for the student), students will be less well served than if you spent a little too much, but still truly leveraged the value technology can provide. Fortunately, there is a proven model for simultaneously improving the effectiveness of your I/T organization while ensuring that your investments in technology are directly in support of your district goals. It goes by the awkward name of ITIL and refers to the extensive IT best practices now adopted by Microsoft, HP, Sun Microsystems and many other companies from all sectors of business.
In a series of articles on TCO Bob Lewis, of IS Survivor and IT Catalyst, has been commenting on the meaning and value of TCO. In his February 2003 article, Lewis highlighted two additional measures developed by his colleague Don Deck of IS Survivor that may put the TCO movement in perspective. He suggests that we consider analyzing TCOL vs. TCOD (Total Cost of Living vs. Total Cost of Dying) and TCOI vs. TCOE (Total Cost of Ignorance vs. Total Cost of Education). The conclusion, and the only one he could arrive at under the assumptions, is stated by him this way: "I suspect that this would prove that it would be most cost-effective if we all died young and ignorant." Lewis surmises that such are the hazards of calculating cost without attention to value.
Gartner, in fact, has added a new metric related to value they call Total Value of Ownership (TVO). Even though Gartner has not put forward a formula, Lewis offered his own. He believes that measuring cost is the easy part. Education IT administrators, however, know that the cost of troubleshooting by end users, the high cost of downtime due to interruptions to services and the cost of training don’t show up in IT budgets, but are just as much a cost of operating IT as the salaries and equipment purchases in the IT department. And, these are not easy to calculate.
An even harder part is calculating the benefit of IT or the value of IT to the enterprise.
Here is Lewis’s suggestion for calculating value:
1. Calculate the TCBP (total cost of every business process) that IT supports.
2. Design the BPAP (best possible alternative processes) that use no technology more complicated than a hand calculator.
3. BPAP - TCBP is the value provided by IT. (BPAP - TCBP)/TCBP is the return on IT investment -- astronomical in nearly every case.
The value of IT is the value of any instructional and administrative processes made possible by IT coupled with the value of productivity improvements in processes enabled by IT. Said another way, any function of the school district that relies upon technology is a process
enabled by IT. Bus scheduling, payroll, grade books, student information systems and much, much more are all IT enabled services. The only realistic way, then, to assess the value of any enabler, like IT, is to compare what you're doing to the best you could do without it. Determining value in this manner has nothing to do with what technology is deployed (e.g. Windows, Linux, wired networks or wireless) and everything to do with how educational processes change as a result of adding or removing technology.
There is a theoretical place to begin. Calculate number one, the total cost of every business process, first. Performing this calculation would be a huge task. Fortunately, ITIL can show the way. The first step is to define each service supported by IT. A “service” is another way of labeling a use to which end users put IT resources. Calculating grades in a grade book application or performing the district accounting functions in an ERP application constitute services. Next you establish the business objectives to be achieved. For the grading service mentioned above, this would include measuring student achievement, providing legally mandated information on achievement, providing guidance to teachers on areas requiring further classroom instruction, etc. The value of these objectives establishes the value of the IT service. The higher the urgency and priority of the service the higher the value of IT for delivering that service. The last step is to assess which IT resources are required to deliver the service and clearly establish the level of performance needed from these resources to meet the business goals. The ITIL best practice for this focus on services is called Service Level Management.
The steps in the entire Service Level Management process are:
1. Define the service.
2. Describe the vital district functions and objectives achieved by the service.
3. Define the level of delivery performance required for the service to be viable (urgency vs. impact).
4. State the measures used to determine the level of success for achieving the objectives.
5. List the IT components involved in delivering that particular service.
6. Establish performance guidelines for the IT components that correspond to the performance requirements.
7. Describe the internal IT. department responsibilities for service delivery.
8. Describe and quantify the external provider’s responsibilities for service delivery.
9. Begin remotely monitoring all components by service delivered.
An IT best practice process in Service Level Management supports each of these steps. The value provided by IT is in its ability to deliver all services according to specified levels of reliability, availability and performance.
These best practices have been widely accepted and adopted in industry but are not yet a part of the discussion and practice in IT for education. As soon as an IT department adopts an education version of best practice for IT, the organization will see a shift in emphasis away from devices and infrastructure and toward providing services to the end users that enable achievement of the district’s objectives. This is when the balance between total cost of ownership and the total value of ownership becomes clear and can be meaningfully calculated. Until then, the calculation of TCO based only on downtime, repair, training and other such variables is important but can only tell, at best, half of the story. TCO should be used as one means to maximize TVO or Total Value of Ownership as the key metric for measuring the return on investments in IT. The record of success in deploying ITIL-based best practice in the commercial sector clearly indicates the time is right for education IT departments to follow suit. By putting the users and their usage of IT ahead of the technology itself, IT departments in education will benefit both from the cost savings that come from doing things right, as well as the transformation that technology enables when we use it to do the right things.
John C. Wilkinson, Ph.D is vice president, marketing, JDL Technologies and can be reached at (801) 765-1921 or by email at jwilkinson@jdltech.com.
