Making the Case for TCO

• By Larry Goldstein
• 01/31/05

Is Total Cost of Ownership a costing model worth considering? In a word: Yes.

It’s an accepted reality in higher education that no one really knows how much is being spent on technology, and that’s a very real problem because information technology now represents the third largest cost category behind compensation and facilities-related costs. Though annual studies (Educause’s Core Data Survey, www.educause.edu/coredata, or the COSTS Project, www.costsproject.org) attempt to quantify IT expenditures in specific categories, at best they focus only on the centrally budgeted investments. This is problematic because, even on relatively small campuses, it’s common for technology investments to be made in academic and support departments outside the central IT organization. In larger institutions, especially, amounts spent in decentralized units can be substantial: Nationally, IT accounts for about 7 to 8 percent of annual campus expenses (a hefty sum, considering that total expenses approach $300 billion).

And what costs should be counted? Most IT directors would agree on categories such as hardware, software, technology infrastructure (e.g., networks), and compensation for staff working in central IT departments. But what about other less direct costs? For instance, how much if any of the purchasing department’s costs should be considered an IT cost? Similarly, if the HR department’s new employee orientation program includes a module explaining how to use administrative systems, should this be considered an IT cost? And what about the person working in an academic department who spends the majority of his time assisting faculty with their instructional technology needs?

Marginal costing. There are at least two ways to measure costs (in general), and arguments can be made for each, as it relates to IT costs. Many administrators support marginal costing, which recognizes only the additional out-of-pocket costs incurred with the introduction of a particular activity such as technology. Under this approach, the purchasing department’s costs are ignored until the volume of IT procurements reaches the point at which an additional staff position is needed. Until that time, IT is not assigned any procurement costs.

Full costing. Others favor full costing which considers both direct and indirect costs. Under full costing, an appropriate portion of an institution’s overhead is added to an activity’s direct costs, to determine how much is being invested in the activity. With this approach, the theory is that support provided for an activity is unavailable to other activities. Though not necessarily precise, full costing is deemed to present a more accurate picture of what it takes to conduct an activity. Still, it must be noted that, because indirect costs are included under full costing, this approach increases the pricetag for all activities.

TCO to the Rescue

With all of the confusion surrounding higher education IT costs, it’s no surprise that relatively few campuses consider the total cost of ownership (TCO) of technology. Introduced in the late 1980s by Gartner (www.gartner.com) to examine the full costs related to desktop technology, the concept has expanded to cover all aspects of IT. Under TCO, an organization attempts to measure the full costs related to a particular facet of technology. According to Ted Bullen, a strategic consulting manager at IBM (www.ibm.com), the lifecycle for a PC includes planning, purchasing, deployment, support, asset management, and disposal. Specific costs can be identified with each of the six phases. Bullen suggests that an organization consider costs in each of these categories when assessing planned investments in desktop technology. The same categories and cost principles apply to any technology being deployed on campus.

Though few colleges advocate a TCO approach, two that do are: North Shore Community College (MA), whose administrators opted for a TCO approach when they considered introducing a campus portal, and Houghton College (NY), which has utilized a TCO approach for its investment in personal computing for its students.

Funding and ROI as Drivers: NSCC

CIO Gary Ham and Jan Forsstrom, VP for Administration and Finance, worked together to identify the full range of costs that would be incurred with the introduction of a portal provided by SCT Campus Pipeline (www.sct.com/Education). They agreed that understanding the complete cost picture was essential for at least two reasons: First, some of the costs were eligible for funding under a state grant program, but only if they were able to document the costs. Second, Ham and Forsstrom needed to measure the return on the investment required to implement the portal; with scarce resources, they wanted to be sure they would receive value.

Benefits of understanding costs and ROI. Although the primary goal of implementing the portal was improved operational results, Ham and Forsstrom felt it was important to understand the costs and ROI, in order to properly market the portal concept to the campus. At the same time, they wanted to manage expectations and avoid unanticipated costs down the road. Understanding the full range of costs was essential to these objectives.

The project has been an overwhelming success—both operationally and financially. NSCC achieved the operational objectives and has essentially lowered the TCO for the portal by expanding the applications the portal supports, without additional investment. The ability to leverage the initial investment has substantially increased the return from the investment as well as the overall value provided by the portal.

Expanding Computing via TCO: Houghton

Jeff Spear, VP/Finance at Houghton College, was trying to solve a different problem. With campus space at a premium, Spear sought to convert existing student computing labs to classrooms by providing students with personal computing solutions, thus eliminating the need for dedicated on-campus computing labs. Proposed solutions were analyzed and the decision was made to provide each Houghton student with a laptop upon admission to the college. In the process, the campus adopted a TCO approach to address the six phases identified by Bullen.

Six-phase TCO. The program was well thought out and considered everything from procurement through ultimate disposal of the laptops—assuming the students opted not to buy them upon graduation. An important cost consideration centered on maintenance and support. Given Houghton’s rural New York location, the college chose to become an authorized warranty repair center for the laptop manufacturer, now IBM.

The program has exceeded its goals. The computing labs now are used as classrooms, students have state-of-the-art PC solutions, and both equipment acquisition and support costs have decreased. And, as with North Shore, Houghton has realized additional benefits beyond what was anticipated. The introduction of a fully supported PC solution for students has enhanced the utilization of technology within the classroom and contributed significantly to students’ preparedness for life after graduation.

It’s Time to Consider TCO

Colleges and universities need to take the time to understand and apply TCO concepts to their technology investments. With IT representing such a major investment for higher ed, it’s simply unwise for an institution not to have a comprehensive understanding of the costs related to the various components of its technology portfolio. Despite the fact that expectations of financial returns rarely drive higher ed technology investment decisions, retrospective analysis of the value derived from an investment should be considered in light of what was spent—both initially and over the life of the technology for future. It should be evaluated for future project buy-in, for an on-target calculation of ROI, and to empower the strategic planning process—in short, to improve all IT-based decision-making down the road.