Calculating value for non-material resources can be an exercise in frustration. For example, how does a CIO calculate the value of training for employees, or research on new products, or those soft costs that often appear from nowhere during the scope of a project? More importantly, how can a CIO provide statistical data that reflects the true cost (and benefit) of information technology to the organization?
The best way to quantify what can be an elusive concept is by calculating what is known in business circles as total cost of ownership. TCO is the process of determining all of the costs incurred in using information technology. That includes the acquisition costs as well as things like training and maintenance.
Calculating hidden costs
Using TCO helps to consider those vague elements that erode the ultimate return on an investment. Word processor and presentation management programs, for example, certainly make it easier to create and edit documents and presentations. Your intranet further simplifies employees' lives, saves time, and brings more people into the loop easily. Does that mean you can prove these electronic tools actually bring in more revenue? How do you factor in the lost revenue on those occasions when they break down?
Doing the numbers
No governing body exists that legislates precisely how TCO numbers must be arranged, like GAAP (generally accepted accounting principles) for general accounting, or the Internal Revenue Service for tax preparation and filing. The organizations that have produced general guidelines for calculating TCO are: hardware and software companies, consultants, publications, and other advisory types. IT expenditures are grouped into three areas:
- Direct costs: Includes hardware, management, support, development, and communications.
- IT costs: Information technology budget and staffing expenses.
- Indirect costs: End user costs and downtime.
A ballpark figure
Do not expect even the most precise calculations to predict a completely accurate financial forecast. There are far too many dynamic intangibles. The point of looking at TCO is not to overanalyze but to get a good understanding of all the costs and the benefits, and being able to balance those two. So use common sense when weighing capital outlays, especially in areas like training.
Training can be difficult to quantify and is often overlooked. Just remember that training takes place whether or not you use a formal program. There is a hidden cost if employees rely on each other for training. It may actually be more cost effective to bring in an outside trainer in certain situations.
No absolutes in TCO
There is no absolute method to calculate exactly how much payoff will be realized by investing in technology. Even the most astute cost analysts can't factor in all of the intangibles—or the unexpected problems or benefits involved in a technology implementation.
You can make an educated guess ahead of time and then do a more thorough evaluation when it comes time to reinvest your technology dollars. The only thing you stand to save is money.
Here are the steps to calculate total cost of ownership (never absolutely accurate and all-inclusive):
- Collect all related financial data.
- Generate reports on these numbers to calculate the actual TCO.
- Use benchmarks to compare results to industry averages.
- Generate more reports to highlight potential problems and suggest action items.
- Plan acquisitions and alter existing plans if necessary, sometimes using "what-if?" analysis.
- Provide help along the way, either with extensive online resources, live help desks, or both.
Jack Fox is executive director of The Accounting Guild in Las Vegas. Fox has been assisting thousands of accountants and IT consultants in building their own successful businesses. He also has coached for effective leadership in IT functions of small to mid-size enterprises since 1984. He is the author of five books, including the third edition of Starting and Building Your Own Accounting Business , published by John Wiley & Sons.