“I like TCO — Total Cost of Ownership. I feel like it’s a much more accurate economic model of price. Granted, it’s just price, not usefulness, but as long as you know that, then it’s a highly useful metric, much better than manufacturer’s suggested retail price.”
So said Mike M in a comment he posted to a recent KJR, which took some courage given how often I ridicule … uh … critique TCO in this space.
Credit where it’s due, he’s quite correct. TCO is a more accurate measure of spending than MSRP. That doesn’t fix any of TCO’s intrinsic flaws. Quite the opposite, it puts a spotlight on a flaw I ignored in my last missive on the subject: From a 7 C’s perspective, neither MSRP nor TCO are Connected to any important goal.
Wait, wait, wait, wait, wait! I can hear you shouting at your screen. Yes, reducing costs can be painful. It’s still an important goal in most or all businesses, isn’t it?
Well … no, or at least it shouldn’t be.
Increasing value is an important goal. Cost-cutting can be a useful way to increase value, but, as I’ve pointed out enough times to make your eyeballs roll, only when the organization can cut costs without a commensurate reduction in benefits.
As I haven’t pointed out enough times (yet) to make your eyeballs roll, reducing TCO can drive a short-term perspective that can, over time, prove calamitous.
For example …
I have, over the years, run into a handful of companies that (I’m not making this up) wrote their own development languages, transaction processing handlers, and file management software. In some cases these companies used their proprietary platforms to write proprietary applications that underpinned their go-to-market services.
No question — they reduced TCO quite a lot compared to competitors that had to license COBOL, CICS, and VSAM from IBM, not to mention licensing applications instead of relying on their home-grown ones. They passed this reduction along to their clients in the form of lower prices that helped them win and retain business.
What’s not to like?
Let’s start with staffing. Someone has to maintain these proprietary platforms. The folks who wrote them decades ago either have retired or will retire soon. Recruiting programmers qualified to and interested in taking on this sort of work is, in this day and age, pretty close to impossible.
But if you can’t recruit, why not just freeze the platforms in place? They all work, after all.
But that assumes the next IBM mainframe they buy, with any operating system that’s available and maintained by IBM, will run proprietary platforms written before IBM re-named MVS to Z/OS.
So … never mind all that. Nothing lasts forever. It’s time to convert the application to a more modern platform.
A fine idea, made even better by the only other alternative that would work being shuttering the business.
One problem with the conversion strategy is that decades of enhancements made to applications that are directly visible to customers either mean a lot of time and effort adapting a commercial package to service contractual obligations; or else committing the very large investment of capital and effort that would be needed to rewrite the application on a modern platform.
One more challenge: As mentioned, companies like these won and retained business by offering more attractive pricing than their competitors, made possible by avoiding the costs of licensing COTS applications and commercially available development and operating platforms.
No matter what these companies convert the applications to, they’ll be paying non-trivial license fees they’ll have to pass along to their customers in the form of higher prices.
They are, to turn a phrase, borrowing from the future.
Businesses borrow all the time. When it’s money, your average banker will work with companies to restructure debt to improve the odds of being repaid. The future isn’t like that. When the time comes, it demands repayment, often at usurious interest rates, and with mafia-like collection practices.
No argument — this week’s example of TCO reduction gone wild is extreme, and by now increasingly uncommon.
But while your IT shop probably doesn’t rely on proprietary platforms, other forms of technical debt — the term we use in IT for borrowing from the future — are distressingly common just as funding to repay them is distressingly uncommon.
Even TCO’s strongest advocates will agree that accurately calculating it ranges from difficult to Full Employment for Accountants.
But compared to the challenge of accurately measuring and reporting technical debt, TCO calculations look easy. Perhaps that’s why you never see technical debt and other forms of future-debt on company balance sheets.
Or maybe it’s just because reporting future-debt isn’t required, and would make the books look worse than ignoring it.
Whew! It seems to me an organization would need a pretty sophisticated team to do the level of analysis you recommend. Wouldn’t you also need an HR department competent hire people qualified to do this degree of analysis, no matter what department they were in charge of? It could pay big dividends, but only if everyone on the evaluation team was competent to do the level of analysis beyond TOC that you advocate.
It seems to me like a tall order for most organizations, but maybe that’s not true for Fortune 1000 companies. I’m happy to be wrong on this.
Cost of a tool is only one factor. What a tool produces is the other side of the cost-benefit relationship.
1. There is a dysfunction with doing one-sided cost-analysis (instead of 2-sided cost-benefit analysis).
Take employees. You should be making money off of each and every employee (otherwise why fill the position?).
2.Trying to calculate the exact profit per employee per job duty is an effort in uselessness (TCO?)
but when a company gets in the position of thinking of employees as a cost and starts layoffs to “save” money, they are getting on a downhill grade that is usually impossible to get off of.
No argument – accurately measuring technical debt can be daunting. We’re talking about identifying every component of the technical architecture … or maybe the CMDB … and estimating what expenditure would be required to bring it into conformance with all relevant IT standards.
There’s quite a lot on the web discussing how to do this. What I haven’t seen is much about how to sidestep the cost of estimating it all.
I think there are some possibilities, but I’ll hold off until I’ve had a chance to think them through.
Oh, yes, I remember the days when companies boasted of ‘do-it-yourself’ systems. Some ended up running mission critical systems. Others were the in-house version of SAP. And then when SAP was brought in… whoo-doggie!
So a company becomes successful, very profitable for 20 years by doing all development in house and then crashes when things change. To me, that’s a great deal. Most companies don’t get successful or profitable during their entire lifetime and many companies that become successful by doing things “the right way” go out of business 20 years later anyway. I’d take the self-development deal any time. And hope to repeat 20 years late.