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Slide 1: A TriActive White Paper Calculating Your Total Cost of Ownership (TCO) In today's IT world, all IT Managers need to know what the acronym TCO means and understand how their TCO number relates to the standards touted by the industry press. How do you REALLY calculate your Total Cost of Ownership for a desktop PC? Introduction As the manager of an IT organization, how do you feel when you pick up the latest edition of your favorite technical publication and find an article about how the total cost of owning a desktop PC in an organization has recently risen by $1,000 per year? Do you feel excited enough to rush to your boss and show him that your operation is running $2,500 under industry standards, and you expect a raise to reward you for your superb management skills? Do you scour the building and burn all copies of the article in case anyone realizes that you're running at $3,000 more than you should be? Chances are you do neither because you have no real idea what your Total Cost of Ownership is for your PC equipment. What may be even more unnerving is if your boss reads the article before you do, and then asks you what the TCO actually is in your company. The purpose of this article, and the associated analysis tool, is to help you gain real knowledge of everything that goes into a TCO calculation and then help you analyze what the actual number is for your organization. First, you have to take into account both DIRECT and INDIRECT costs. Some of the information may be difficult to find; we've provided some industry averages for those instances. DIRECT costs are relatively easy to obtain. You should know from experience, or by talking with your accounting department, what your total salary costs are, and how much you spend buying hardware and software. Your accounting department will also have information on how much depreciation is being charged to you or your user departments on your IT capital items. INDIRECT costs are always difficult to ascertain. It is virtually impossible to track how much time your end users spend fixing their computers in one way or another, unless you get everyone in the company to keep detailed timesheets (and that's counter productive in itself!). For your indirect cost calculations, you may need to rely on your best estimate, or use the industry averages which we provide. Calculating Your TCO Review the following information for details on what items are included in each calculation. Then, turn to the analysis tool
Slide 2: Your Total Cost of Ownership (TCO) Page 2 at the end of this article to find the TCO for your organization. Organization Statistics Before you start gathering detailed cost information, there are three simple pieces of information you need to know: 1. How many PERSONAL COMPUTERS (PCs) do you have in your company? Unless you have a good hardware inventory system (which is an important part of an asset management program), it may be difficult to get a complete count, but you should attempt to get this with as much accuracy as possible. Take into account ONLY those computers that are accessed by end users, and do not include PCs that are functioning as corporate servers of any kind. This number should include any laptops that are used by enduser personnel, as well as any PC equipment used by internal IT staff. 2. How many end users of PCs are there in the company? This is not necessarily the same number as in question 1, as many companies have a number of users with two or more computer systems. 3. What is the average PC end user's salary? You'll almost certainly have to get this number from your accounting department. You want to know what is the average salary of everyone in the company who uses a computer, including all the executives, all the managers and all the sales staff. It's very unlikely that you have detailed salary information on all employees at your fingertips; so accounting will probably give you their estimate. As with all statistical information, this needs to be as accurate as possible, but not EXACT to the nearest cent. Direct Costs Hardware and Software Hardware and software costs are the annual expenditures associated with all purchases of client, server, network and peripheral devices and any related software products. This category is for hardware and software expenses only and does not include any IS labor fees. It is essential to involve accounting and purchasing in accumulating the information for this category. Hardware should include ALL (but not be limited to) of the following items: • Desktops and mobile computers • Servers • Peripherals • Network communications equipment (hubs, routers, bridges and switches, etc.) • Memory • Storage devices • CDROM drives • UPS devices • "Cards” of any kind • Cabling Software should include ALL (but not be limited to) of the following items: • New and upgraded software for any client computer, server, peripheral and communication device • Operating systems • Off-the-shelf application software such as word processors, spreadsheets, etc. (This should NOT include the costs for any internally developed software, as this is covered in a later calculation.) ________________________________________________________________________ TriActive, Inc. September 2001
Slide 3: Your Total Cost of Ownership (TCO) Page 3 4. How much do you spend on hardware expense purchases in an average year? Use the past 12 months of expenses on hardware to give you a reasonable idea of what you spend. Remember, however, that most large hardware purchases are generally counted as capital rather than expense items, and this question should ONLY be answered with expense items. Capital items are included in the depreciation line of question 6. 5. How much do you spend on software expense purchases in an average year? Use the past 12 months of expenses on software to give you a reasonable idea of what you spend. Remember, however, that most large software purchases may be counted as capital rather than expense items, and this question should ONLY be answered with expense items. Capital items are included in the depreciation line of question 6. 6. How much is your annual depreciation on hardware and software capital purchases? Your accounting group will supply you with the depreciation charges for large hardware and software purchases. Depreciation typically uses a three-year, straight-line schedule for hardware and software. Occasionally, certain hardware items are depreciated over longer periods, but this should be checked with your internal accounting group. 7. How much do you spend annually on computer supplies? Include the annualized expenses for all computer supplies used throughout the organization, such as diskettes, CDROMs, tapes, toner and other general disposable supplies. 8. What are your annual hardware and/or software lease costs? This should include any lease fees for hardware, software or supplies. Management and Staff Now it's time to figure out how much you spend on the people who manage your enterprise networks. The salary information should be as accurate as possible, and you should not worry about 'burdening' in overhead costs, as this is automatically calculated by the analysis tool. Just use total compensation, consisting of base pay plus any bonuses that employees may receive over the course of the year. If you expect to give raises during the year, include the appropriately prorated amount in the base salary. 9. What is the total salary for each of the following categories (including management staff)? If you have multiple offices with remote employees, they should be included in these figures. Everyone who is part of the IT Infrastructure group within your organization should be in one of the following groups. If there are people in other departments (such as purchasing) who spend a percentage of their time working on IT Infrastructure issues, then their prorated salaries should also be included in the appropriate category. We have tried to keep this section to a minimum number of categories, but be aware that the following detailed list of functions should be considered when deciding who contributes to IT Infrastructure: • Network Management • Troubleshooting and Repair • Traffic Management and Planning • Performance Monitoring ________________________________________________________________________ TriActive, Inc. September 2001
Slide 4: Your Total Cost of Ownership (TCO) Page 4 • • • • • • • • • • • • • • • • • • • • End User Administration Operating System Support Maintenance Labor Systems Management Systems Research and Planning Evaluation and Purchase Software Licensing and Distribution Asset Management Application Management Security and Virus Protection Hardware Configuration Hardware Installation/Disposal Storage Management Disk and File Management Capacity Planning Data Access Management Backup and Archiving Disaster Planning and Recovery Repository Management Outsourced Management Fees Internal Training Personnel If you have dedicated internal training resources who allocate some or all of their time to providing IT training to Infrastructure personnel or to end-user personnel, they should be included in this category. IT Purchasing Personnel Many IT organizations don't have dedicated purchasing agents, but you should include a proration for purchasing personnel who are involved in the acquisition of IT equipment. General End-User Support Personnel Include cost information for any administrative staff who are involved in IT Infrastructure support, such as a receptionist or secretarial staff. Other Infrastructure-Related Personnel Anyone who works for the IT Infrastructure group who doesn't fit easily in the above categories should be included here. 10. What are your annual travel costs for all of the above personnel? If any of the IT Infrastructure personnel travel during the year for job-related reasons, include all travel and accommodation expenses in this category. 11. How much do you spend annually on consulting fees and/or professional service fees relative to infrastructure and operations? A number of companies use specialized consulting staffs for project or task-related reasons during the year. Any such Note that in the analysis tool, salaries are automatically increased by a 30% burden to cover insurance, benefits and accommodation costs. Help Desk Personnel This includes all the people who staff your help desk, and all associated managers. Systems Administration Personnel This includes all personnel involved in keeping your computer systems, applications and peripherals up and running, including dispatched and advanced support services (Tier 2 and Tier 3). Network Administration Personnel This includes all personnel involved in keeping your networks up and running, including dispatched and advanced support services (Tier 2 and Tier 3). ________________________________________________________________________ TriActive, Inc. September 2001
Slide 5: Your Total Cost of Ownership (TCO) Page 5 expenditures should be grouped into this category. 12. How much do you spend annually on outsourcing any of your IT operations? If you outsource any of your IT operations, such as using an ASP to provide any of your IT services, use this category to record the costs. 13. How much do you spend annually on training for your IT Infrastructure personnel? You have already accounted for any internal training staff activities in your response to question 9; do NOT include them in this category. However, if you send your personnel to external training, or if you use an external resource to develop or deliver training courses for ANY use within your personnel or enduser community, include the costs in this category. 14. How much do you spend annually on maintenance contracts for your PC equipment? If you outsource the maintenance of any of your PC equipment, then you should include the annual fees in this category. If you pay these fees on a one-time basis for multiple years, you should amortize the one-time fee during the analysis period. Development Since we have already covered any hardware purchases in a previous section, development costs consist of the annual labor and fees for the production and maintenance of all applications. There are two categories of applications that should be considered: Business Applications These are the programs that are primarily used by end users conducting the main business of the corporation. These typically include such applications as accounting, order processing, sales, payroll, inventory, and human resources. Infrastructure Applications These are programs that do not directly impact the business of the corporation, but are used in the support of the system infrastructure. These include systems management, communications software, database software and office-productivity suites. Depending upon the organization of a development department, some personnel may fit into more than one of the following categories. If so, prorate their time to each category. 15. How much do you spend annually on salaries in the following new application development areas? The salary information should be as accurate as possible, and you should not worry about 'burdening' in overhead costs, as this is automatically calculated in the analysis tool. Just use total compensation, consisting of base pay plus any bonuses that employees may receive over the course of the year. If you expect to give raises during the year, include the appropriately prorated amount in the base salary. Design The personnel involved in gathering user requirements, defining specifications, designing architecture, and prototyping a project. ________________________________________________________________________ TriActive, Inc. September 2001
Slide 6: Your Total Cost of Ownership (TCO) Page 6 Development The personnel involved in the production of the code for a project. Testing The personnel involved in the development of QA testing plans and the execution of the testing. Documentation The personnel involved in configuration control and technical writing for applications. 16. How much do you spend annually on salaries in the following existing application maintenance areas? The categories here are identical to those in the 'new' application development in question 15. This category covers those personnel involved in the maintenance of existing applications, rather than the development of new ones. 17. How much do you spend on consulting fees and/or professional service fees related to development efforts? This category should include any fees paid to external organizations or individuals for any design, development, testing, or documentation work done in conjunction with new or existing projects. Communications This category covers all annual expenses for voice and data communications lines and usage. 18. How much do you spend annually on leased lines? This includes monthly, recurring costs for switched and dedicated circuits, including 56k lines, ISDN, and T1 and T3 lines. 19. How much do you spend annually on remote access communications? This includes costs for circuits used to provide remote access to your LAN, any Web hosting fees, and Internet Service Provider fees. 20. What are your annual WAN costs? This includes any long distance or monthly usage charges allocated to the client/server network. Indirect Costs Indirect costs are those IT-related expenses that are not budgeted and invariably are unaccounted for by most IT departments. The largest area within this category is typically the self-support and peer support of end users. The activities performed by end users include debugging their own systems when errors occur, backup and restoration of valuable data files, file directory maintenance, casual computer learning during the work day, and end-user programming of minor (or major) applications. In attempting to reduce direct costs, a number of organizations will slash IT support budgets, without realizing that there will be a corresponding rise in indirect costs as end users spend more time supporting themselves and their friends and colleagues. There is no really accurate way to measure how much time end users spend on IT-related tasks without detailed timekeeping or statistically valid surveys. ________________________________________________________________________ TriActive, Inc. September 2001
Slide 7: Your Total Cost of Ownership (TCO) Page 7 For those of you without the time or resources to conduct lengthy in-house surveys, we have provided some industry standards as guidelines in the appropriate categories. 21. How many hours annually does the average PC user spend on computer-related training? When introducing a new end user to the corporate computer systems, there is often time spent on in-house training. Similarly, whenever a new application is introduced to the organization, all the end users need to go through some kind of training and familiarity program. These and other training times should be included in this category. Our research has indicated that 40 hours per year is a reasonable number to use if you are not sure, but this can be modified as required. 22. How many hours annually does the average PC user spend on local file maintenance, end-user self-support, and end-user scripting of applications? This is the most difficult number to estimate without detailed studies and surveys. Our research has indicated that 40 hours per year is a reasonable number to use if you are not sure, but this can be modified as required. 23. How many hours per month of end-user productivity do you lose due to planned or unplanned system and network downtime? Downtime expenses are a measure of the annual losses in productivity when end users cannot perform their jobs as planned due to the unavailability of their computers. This can be for a variety of reasons, such as: • Waiting for resolution of a help-desk problem • A planned or unplanned system down event • Unavailability of one or more programs • Server problems causing denied access to necessary data Our research has indicated that 2 hours per month is a reasonable number to use if you are not sure, but this can be modified as required. Comparison After you have answered each question on the following analysis tool with information about your organization, the annual Total Cost of Ownership for each of your PCs will be calculated and displayed. The current average is around $10,000 per PC per year. How do YOU compare? Copyright © 2001 by TriActive, Inc. All rights reserved. Any reproduction or redistribution of this information beyond your organization without the written consent of TriActive, Inc. is strictly prohibited. ________________________________________________________________________ TriActive, Inc. September 2001