CXO

How to create a technology replacement strategy

Developing a technology replacement strategy is an essential part of managing the IT budget. Evaluating operating costs versus acquisition costs can lead to a standardized replacement strategy.

When you are considering the cost of your organization's technology, you must consider its life cycle and make allowances not only for the purchase price of the technology but also its support costs.

Life cycle

Every mechanical device has a life cycle. In the early days of the device, there is a period of "shaking out" when a relatively large number of problems will be discovered. This's why many mechanical devices go through a burn-in period at the manufacturer in an attempt to work out the problems. This is generally followed by a long period of relatively low problems. Finally, a gradual climb in support costs ensues.

Think of it like buying a car. If you have ever bought a new car, or have known someone who has, often the new car has a few kinks. After the first month or so, the car settles down and generally has few problems. Once the car has become a few years old, it begins to develop problems. The problems may be gradual at first but eventually, if you keep the car long enough, you begin to feel that it is nothing but problems.

The technology that you use in your organization is the same way. Every piece of technical infrastructure you have will work well at first, or at least well after the burn-in period, and then slowly start to deteriorate.

This is one of the reasons that older computers need to be replaced — even if they're still operating fast enough for their users. Eventually, they'll break down and will need to be repaired or replaced.

Capacity management

In the computer world, it is more likely that the capacity of a device will be outstripped before its life cycle begins to show the slow rise of problems. For example, the core switch which housed 10 Mbps Ethernet just is not fast enough, or the replacement with 100 Mbps connections is not fast enough either. Today's switches with 1 Gbps connections will not be fast enough in just a few years. The amount of capacity that we are consuming, whether it's network speed, hard disk space, or processing speed, is growing. Even with careful capacity planning, it may be necessary to replace some devices on a cycle of three years or less.

The challenge is that often when we upgrade to a new device with the capacity we need, we move the previous device into a supporting role. It may aggregate many connections, or may be used for less mission critical tasks, or may simply be assigned new tasks. This reassignment is a prudent way to manage resources - that is, until the life cycle starts to catch up with the devices.

Planned replacement

The key to a well-formed technology replacement strategy is knowing when it will be necessary to start replacing the technology. Most organizations have enough data to make educated guesses about when technologies will need to be replaced. The dollars and cents of this estimate is a relatively simple equation which calculates the cost of support compared against the acquisition cost.

The support cost equation adds the costs associated with:

  • Reduced productivity — How much will be lost in a given year due to the lack of speed in the existing solution?
  • Down time — How much will it cost to have an outage in the component multiplied by the probability that the down time will occur in a given year?
  • Support Agreements — If the device is beyond its warranty period, and it is necessary to maintain a support agreement for it, the cost of the agreement should be added in.
  • Support Calls — If the device is beyond its warranty period, and you elect to pay for service calls, the cost of those calls multiplied with a best guess estimate on the number of calls should be added in.
  • Staff support time — If your IT staff will have to invest time in supporting the solution, it should be added to the overall support costs.

This is compared with the costs associated with the acquisition of a replacement:

  • Acquisition cost — the actual cost of the device. This should include any taxes or freight.
  • Setup cost — the cost to get the device set up on the network to replace the existing device. This should include any fees, as well as staff time, multiplied by a reasonable rate.
  • Learning curve — The time that your staff and the users will need to understand the new device multiplied by a reasonable rate to convert it to a cost.
  • Risk — Some assignment of a dollar value to the risk that the new system will not work or will not work as intended. Every new device has some risk. The newer the device being proposed for acquisition, the more risk is associated with it.
  • Support costs — the cost of supporting the item for the first year. This should include agreement costs, support call costs and staff time costs.

Comparing the two numbers side-by-side can tell you whether a replacement makes sense or not. However, often a direct comparison of single year numbers is not always sufficient to demonstrate the need to replace hardware. Sometimes, particularly with acquisitions with long life spans, it is necessary to carry the support and acquisition costs together over a multi-year period to determine when and if the replacement is warranted.

The long term replacement

Taken to the next step, you should be able to predict the time when the replacement cost for a device will be more cost effective. It is this evaluation – when it is more costly for the organization to continue to use and support a device – which is the core of a technology replacement strategy. Each device type is evaluated and an evaluation is performed on the reasonable replacement life cycle.

The following may help you get started by providing some rough guidelines for replacement of various kinds of technology devices:

Device

Replacement Period

Personal Computers

3-5 years depending upon function

Personal Digital Assistant (PDA)

2-3 years

Servers

3 years

Networking Infrastructure

5 years

 

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