When it comes to technology, Total Cost of Ownership (or TCO) is a bit like the real estate game. It’s not just the buy, sell and renovation prices that determine if a property is a good investment, but also the interest on the mortgage, the fees and the headaches along the way.
It’s the same with computers.
As technology evolves and businesses become more reliant on their computer systems to operate effectively, small companies can feel overwhelmed by the burden of hardware and software upgrades, often losing sight of their investment.
Understanding their total cost (that is more than just the purchase price) can mean the difference between an ad hoc technology environment and one that draws true benefits — such as increased productivity, greater ability to compete and better cash flow.
Let’s face it: unless yours is a technology business, you probably just want it to work so you can get on with whatever it is that you do best.
What to consider in the TCO
Otto Ruettinger, Australia and New Zealand Small Business Product and Marketing Manager at computer vendor Lenovo, says the total cost of technology ownership is like an iceberg: 90 per cent of it is hidden under water.
“The 10 per cent above the water is the purchase cost, and what the user usually concentrates on,” he says.
Cost elements such as reliability, warranties, downtime and the ability to stay productive without having to rely on helpdesks, should also be considered as part of TCO of hardware, Ruettinger says.
But TCO is much more than hardware, says Michele Caminos, Small Business Research Vice President at analyst firm Gartner. Other considerations include how the technology will be implemented, its scalability, how it will integrate with existing systems, its longevity, on-going maintenance costs and training requirements.
It is true that a 20-employee business does not need the technology infrastructure of a large company, but growing on an ad hoc basis has drawbacks.
“Small businesses don’t need the massive integration, the massive servers and the complexity of a larger enterprise infrastructure. What they need is to have an IT strategy along with their business strategy,” Caminos says.
“Say they are growing at X per cent a year. What will they need to support this growth?” There is a substantial management cost associated with technology from the moment it is purchased, but business owners and CEOs don’t necessarily think about that.
“There are many aspects to total cost of ownership and there are ways you can lower the stress on the organisation, not necessarily the cost — through cloud, for example,” she adds.
Software licensing, subscription models and the cloud
Software companies are blunt about this: the most expensive way to buy software is by the box at your nearest retailer.
Software that comes preloaded on new hardware — also known as OEM (original equipment manufacturer) — is cheaper, but only if you need a new machine.
More cost-effective options for existing hardware include volume licensing discounts and subscription models which can include licence in perpetuity or on a month-by-month basis.
Microsoft’s Licensing Marketing Manager Danny Beck says the cheapest way to buy copies of Windows or Office is via OEM deals, but if you have five or more users or are looking for Microsoft Project Exchange, Windows Server or Vision, the company’s “Open” program has more advantages.
Microsoft’s Open Value model is for businesses that want to standardise the same version of software on all their PCs. It includes perpetual license, maintenance and upgrades on a three year contract with a third of the price due each year to help cash flow. The Open Subscription model costs less per year, but after three years the license is revoked and must be uninstalled. If you feel you will always renew it, this option is the cheapest, costing 50 per cent less on average.
“My recommendation is to talk to your Microsoft partner as they can advise you on what’s most suitable for your needs, cash flow and type of business,” says Beck.
Calum Russell, Group Marketing Manager at Adobe, says most software vendors offer a licensing program that allows for multiple installations and attracts volume discounts.
“It also gives users the ability to buy maintenance and automatic upgrades,” Russell says.
As an example, Adobe’s Design Premium Creative Suite 5 costs $3175 in a box, or $1003 as an upgrade from CS4.
By subscription it costs $144 for a single month or $129 per month on a yearly contract.
“We find it’s a very interesting way for small business to purchase because there’s no upfront capital investment, it’s credit card payment and they can scale up,” Russell says.
But as ever, make sure you read the fine print.
Scaling down is another story. Like phone contracts, if you decide you no longer need it, there will be an exit penalty.
The same applies to cloud computing: there are increasing numbers of software-as-a-service providers catering for small businesses (this will be the subject of an entire issue later this year). In general the cloud advantages for TCO are many: no upfront costs, no need to worry about upgrades or in-house skills to deal with the software and a convenient subscription model.
anyone?) to accounting packages and even Microsoft SharePoint and Exchange.
The secret is to determine your business objectives first, then work with the supplier on the best way to achieve them, paying special attention to issues of up and down flexibility.
Are you using your equipment to its full potential?
One of the more obvious savings opportunities in TCO is to avoid buying new equipment to perform functions your existing equipment can.
The problem is, with so much around, who knows everything a piece of software can do? “I’m sure most businesses don’t use software to its full potential,” says Russell. Adobe has a number of “Live” services, for example, that allow users to collaborate and share work over the internet, but many still just email their PDF documents to each other.
“Even Acrobat has the ability to share through Acrobat.com,” he says adding the company offers free online tutorials for people to get the most out of their purchases.
Buy direct or through a partner or reseller?
Companies with up to 20 employees seldom have a dedicated IT manager. This function is often shared by a tech-savvy business owner or office manager, or handed over almost blindly and full of hope to an IT consultant.
Any calculation of TCO must therefore, include the time and effort utilised in dealing with the technology in-house and with third parties.
Adam Blacklock, group sales manager of family-owned national Apple partner Computers Now, says small businesses tend not to factor in time.
“They don’t put an accurate dollar value on what their time is worth. It’s their biggest cost,” Blacklock says.
So it follows, that a business that chooses to work with one supplier instead of many, may be able to shortcut the time it takes to do achieve their aims.
“It gives them constancy. They don’t have to go explaining everything every time,” he says.
“It’s always a good idea, where possible, to consolidate IT procurement from one channel. That way it can be assumed that it will work and will integrate with everything else. If you buy software from one, hardware and routers from others, each company doesn’t know what you are trying to achieve. You’ll find that even if they do work together, there may be features in each that you’re not using properly.” In dealing with one supplier, there are several options: a reseller, a vendor channel partner or a vendor direct, like Dell which has built its business by supplying directly to companies and openly courts clients by offering consultancy services as part of the package.
Lenovo’s Ruettinger adds asset management, on-going IT support, and an ability to source other equipment like projectors and SIM cards to the wish list.
“They can also buy direct if they are advanced users,” Ruettinger says.