Knowledge Network

Taking reliable IT purchase decisions

Gautam Munish, Vice President, Cisco Capital India

CIOs and CTOs across the world would agree that IT purchase decisions are getting more complex with every passing day. Even before a technology solution has been fully implemented within an organization, rumblings of a new and more advanced version of the same technology can be heard in the market. What was state-of-the-art today is passé within a span of 2-3 years. This is true for all technologies across the board- be it software, hardware or networking. In fact, in many cases the initial acquisition cost of technologies represents as low as 20 percent of the cost of ownership over a given period (generally 3-5 years). The remaining 80 percent of the cost, which include the ongoing upgrades, maintenance and support are often overlooked during the initial phases of a new technology rollout. When it comes to widespread deployments that have mature capabilities, the financial implications of maintaining and upgrading IT infrastructure can be daunting particularly when the costs are unforeseen and therefore not budgeted. "So, what is the solution?" is the question many CIOs and CTOs are often found enquiring.

Before attempting to answer this question, the first task is to consider a defined metric. In order to do that, we need to bring in the concept of Total Cost of Ownership or TCO.

Measuring TCO

From the perspective of deploying networking technology, TCO is defined as all the costs associated with purchasing, installing, and running a network measured in discounted cash flows over a specified investment horizon. TCO can be categorized into two main subheads: direct costs and indirect costs. Both have subcategories that can be readily analyzed.

The TCO model calculates or estimates direct network costs in the following categories:

  • Hardware
  • Spares
  • Expected Upgrades
  • Implementation (Design, Configuration, Installation)
  • Service
  • Training (network support staff)
  • Personnel (network support staff)

Direct costs are straightforward to measure and understand. However, they typically represent a smaller portion of TCO than indirect costs. Indirect costs are those associated with planning, audit and other incidental costs such as consulting, configuration management, downtime (both planned and unplanned) and integration.

A frequently asked question is that if a TCO study reveals that at the end of the fixed period (generally 3-5 years), the cost is beyond what the company can afford to incur, does that mean that the purchase decision is best deferred? Well, the answer is - Definitely Not. It only requires exploring financing instruments. One such available option is customized leasing.

How Leasing Can Help

Leasing provides the option to reduce upfront investment by focusing on a usage model where costs of equipment are matched to business revenue. This allows businesses to spread the cost of equipment and services over several years. Thus they can opt for flexible upgrade options being provided by technology players. Gartner in a recent report on SMBs noted that through leasing, total cost of ownership (TCO) is lowered as IT hardware and software standards are introduced, and companies begin to proactively plan life cycles for IT assets.

Companies can choose to avail the financing from OEM financers or third party financers, or even choose to mix and match. While direct costs can be factored in while financing from either third party or OEM financers, indirect costs will only be considered by the latter. Moreover, it is important to consider the gain in productivity due to reduced time spent by CTOs and CIOs on solving both day-to-day as well as unpredicted challenges related to financing needs. Also, on account of the differentiated product offering - the Fair Market Value (FMV) leases where OEM financiers take aggressive Residual positions, it helps further lower the direct costs which in turn further lowers the TCO. For clients wanting to hedge against likely obsolescence and for whom staying on the cutting edge of technology is a business criticality, such FMV solutions work out extremely well for their requirements.

As networks expand and converge, most CIOs and CTOs will continue to face the question of adopting accurate models in order to budget for technology acquisition and upgradation. This is particularly the case when maintaining complex IT assets that are required to set-up and run a network spread across cities. TCO analysis is very useful in making fact-based decisions such as identifying the need for customized leasing at an early stage of the purchase cycle. Ability to take such decisions is crucial for CTOs and CIOs to be able to judiciously allocate capital.

 

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