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Sarah Hartland | Industry Analysis | 29th August 2019
Reducing costs is often the driving force behind a system or process switch, and yet we all know the three pillars of People, Process and Technology must be aligned for future business success. Even as people are trained and processes are automated, investment in technology increases. Gartner’s IT Score CIO survey confirms that 62% of CIO’s do not believe that there is adequate transparency of IT costs, contributions and performance. The same Gartner study found that 74% of IT organizations can’t clearly define their IT services and their associated business value. But more concerning is the mention of 81% of IT organizations cannot consistently report/chargeback the full cost of IT services to business units.
The task of cost comparison can be confusing to calculate and communicate. It starts with an important equation: Total Cost of Ownership, or TCO.
Investopedia defines TCO as the “purchase price of an asset plus the costs of operation. Assessing the total cost of ownership represents taking a bigger picture look at what the product is and what its value is over time.” TCO is typically calculated over a 3-5 year period.
Calculating TCO allows you to uncover all costs, both direct and indirect, of ownership. When calculating TCO for your current tech stack, assess the following elements for each system in use:
Application/Software Costs
Software costs are the total capital expenditure for software licenses (on-premise software) and operating expenditure for subscription fees (SaaS).
Services/Operating Costs
Operating costs include hosting and support costs (on-premise). If you’re using SaaS solutions, consider and configuration costs in your evaluation. Operating costs also include employee time or development costs.
Maintenance Costs
Maintenance costs could include both actual costs and opportunity costs related to system upgrades and integrations, configuration, development and downtime.
Other Costs
Costs in this category may vary depending on your preferred model, but “other” costs may include travel expenses, staff training or other one-time or recurring costs you may include.
Not sure where to begin?
Online tools like the ones compiled here provide a helpful starting point.
Why Calculate Your Current TCO?
Our team has seen dozens of different advertising ecosystems over the last decade, but the one factor they share is complexity. Below is an example of a “typical” advertising ecosystem – featuring multiple booking and delivery systems – but even if your tech stack is slightly different, calculating your current total cost of ownership will follow the same process.
Each of these systems may have undergone a similar evaluation before purchase, and chances are a TCO calculation was done as a part of this process. But have you ever calculated the TCO across your entire tech stack?
TCO is also important when you need to:
- Rationalize/consolidate applications
- Reduce costs, but are having trouble identifying what to cut
- Evaluate external service providers side-by-side
- Compare cost against industry benchmarks
How to Compare TCO of New Solutions
Whether understanding TCO is a part of your RFP process or an exercise you complete later in the sales process, make sure you’re dealing with a vendor that is transparent. Using the framework you’ve created to calculate your current TCO, you should be able to evaluate a new solution fairly easily. Done right, you should be able to compare the two scenarios ‘apples-to-apples.’
If your goal is to reduce costs, you should aim to replace multiple systems with a single new investment to achieve ROI. For example, Adpoint can replace multiple CRM, booking and delivery systems – and that consolidation typically results in substantial cost savings for our customers.
Summary
Starting with total cost of ownership is a must when evaluating a change to your tech stack. Understanding your current TCO will help you see the savings (and ROI) of replacing or consolidating systems. Look for a vendor that is transparent with their TCO calculations so you can ensure you’re comparing the same line items.