TCO, or Total Cost of Ownership, is a common methodology to provide a cost basis for an investment’s total economic value. The purchase price is a component of TCO, along with operating costs and variances in other expenses. The TCO methodology is intended to normalize the full cost of alternatives to better understand the financial ramifications of dissimilar alternatives in technical recommendations.
This is a tried and true, fiscally responsible approach. There’s just one problem – it doesn’t work.
Cloud-delivered services are disrupting many assumptions and practices, and the TCO methodology is one of them. Technology no longer needs to be purchased to be consumed. Subscription models offer significant benefits, yet many organizations fail to realize those benefits, because their tools for evaluation and analysis were designed for a different era.
Which is cheaper: a $1,000 fully refundable airplane ticket or a $500 highly restricted ticket? The answer depends on the passenger’s ability to conform to the discounted ticket’s conditions. Assuming the restrictions were acceptable at the time of purchase, TCO tools favor the discounted ticket. Yet, airlines make plenty of profit on highly discounted tickets because, with statistical reliability, plans change.
Yes, plans change. A fact we all know and understand, yet we make long-term capital decisions as if it were not true. We make rigid investments to accommodate the future we expect. The TCO methodology does not easily account for risk.
The concept and intent of TCO remain as valid as ever. Technical decision makers must evaluate the merits of a given solution as well as its projected costs. What has changed is that cloud-delivered services offer significantly more flexibility, a feature that is undervalued by comparing only forecasted costs. It isn’t just about the financial costs – the uncertain future includes totally new technologies and methodologies.
The TCO output is a best-effort forecast. Its accuracy is as good as the quality of the assumptions that went into it. In the past, this forecast, which was applied equally to all options, was adequate, but the cloud changes this by allowing greater customization and control. This means organizations can adjust services and change providers with far greater flexibility than traditional premises models allowed – revising risks and costs with every move.
It’s ironic, really, that TCO methods are applied most critically to long-term decisions, yet they consistently ignore the likelihood of change, which increases over time. Decision makers are advised to understand how cloud-delivered solutions are affecting TCO and overall technical risk.
Whitepaper sponsored by Interactive Intelligence, October 2014