Traditionally such cost centers in a business have been analysed using financial analyses frameworks such as Return on Investment, Payback Period as well as well as gauging the time value of money. These all give vital information to managers and auditors however since the emergence of Information & Communication Technologies and eCommerce requirements managers are realising that traditional costing methods to not accurately reflect such IT investments. Investments in such assets cannot be classified as a single cost instance. Such Investments need constant re-evaluation, training and upgrading. Without a framework to analyse such costs a project is in jeopardy of running over budget and companies will be left in the dark with concerning both justifying the investment and analysing its effectiveness.
The Total Cost of Ownership was developed as such a tool in the 1980’s by Gartner Inc. It allows management to assess the total lifecycle cost associated with IT Projects and systems taking both direct and indirect cost considerations into account. Indirect cost considerations could include the training of personnel, administration overheads and the unforeseen costs of upgrading and maintaining your system.
Whelan and McGrath identify various cost centers in e-Commerce development and implementation as being the following, Adoption, Acquisition, Implementation, Usage, Evolution and Retirement. Under these headings they further subdivide them into both tangible and intangible categories. This not only provides a company with accurate cost information but allows for the comparison of IT Systems both company and competitor wide and more importantly gives management a better foresight when better making purchasing decisions.
Gartner states that “the purchase of an IT asset is but a small fraction of its cost”. Previously when purchasing managers were assessing their buying options the initial product cost would have been one of the most important considerations. Yet it is estimated that post-purchase service costs can average that of 11 times the initial cost. Companies who tendered the cheapest initial package often are not the cheapest when it comes to maintenance, upgrading and levels of service both during and after implementation. Therefore a framework such as the Total Cost of Ownership will identify such factors assessing the complete product lifecycle costs from adoption to retirement.
As well as offering a company cost transparency the Total Cost of Ownership will afford them choice. When it becomes clear that some cost centers will have a major impact on the project a company will have alternatives to consider to best way around solving this problem. For example a manager could recognise the need for offshore outsourcing when it is evident that a local vendor will be much more cost inefficient. This opportunity for clarity of vision will not only guide a company to that of the right direction but could be the deciding factor that manipulates the success of the project.