According to a senior consultant for the Cutter Consortium’s business-IT strategies practice, many companies suffer financially by failing to heed one of business’s discipline cornerstones — figuring the total cost of ownership (TCO) and return on investment (ROI) for technology purchases.
Arlington, Mass.-based IT consulting firm recently released the results of a U.S. survey that found only 42 per cent of respondents conduct both TCO and ROI analysis for major technology deployments. Another 21 per cent admitted to doing no analysis, 17 per cent conduct ROI analysis only, while nine per cent perform TCO analysis only and 11 per cent of respondents said they weren’t sure.
“”Companies have only begun to turn towards discipline, we’re not there yet, but compared to the results of a similar survey conducted back in 1998-1999, there was even less discipline exercised then. Forty-two per cent of companies now collect both TCO and ROI data and that’s significant as it lies at the heart of acquisition and management discipline,”” says Steve Andriole, senior consultant at Cutter and the report’s author.
“”What I’m seeing is companies are viewing TCO/ROI analysis as a fundamental part of larger capital markets,”” says Andriole. “”There’s definitely a shift taking place in corporate America that suggests companies are investigating more thoroughly the costs of their technology purchases and it’s primarily due to the fact that right now, they’re not making money while competition for international funding of IT projects is very high.””
The survey — dubbed IT Discipline: You Either Have It Or You Don’t — revealed 63 per cent of respondent companies conduct ROI and/or TCO analysis before deployment, 14 per cent after deployment, 10 per cent during deployment, while 15 per cent do not conduct analysis at all.
Ron Babin, an associate partner specializing in ROI measurement tools for Accenture Inc. in Toronto, says it’s challenging for any company to thoroughly determine its ROI alone; conducting TCO analysis at the same time is doubly challenging.
“”The cost of ownership is a subset of ROI,”” he says. “”TCO is the supporting metric behind that.””
Babin says he agrees with the overall findings contained in the Cutter report as they fit well with what’s happening in the business community in Canada.
However, he disagrees with Cutter’s view that 80 to 90 per cent of companies should be practicing TCO and ROI discipline.
“”It’s global that companies are applying reasonably good metrics and technologies better than they did a decade ago,”” he says. “”Accenture’s view is that it’s not all about technology, that’s only a small piece of it. There must be something larger in view, an architecture or broader framework for them to consider.””
Mel Thompson, vice-president and general manager, Xerox Global Services, Canada in Markham, Ont., says he found the Cutter report interesting as he agrees that discipline is extremely important within IT and all things related to IT processes and improvement.
“”A majority of companies have moved so far off total quality management that it’s a real concern. The (Cutter) report is good as it reminds of us of that,”” Thompson says. “”Calculating TCO and ROI is a challenge, but companies with a solid grasp on their business processes are able to do it. In general, TCO is not hard to calculate, as it’s concrete and hard dollar based.””
In Thompson’s view, Canadian companies are ahead of their American counterparts in terms of disciplined analytical processes. “”The Canadian marketplace has a conservative decision making nature, we’re more conscious of fact-based management. Whereas in the U.S., there’s a faster decision cycle,”” he says. “”But during their process reviews, they discover their data was not tight enough to conduct thorough ROI analysis.””
Andriole says an indicator of a disciplined organization can be found within its performance-based acquisitions.
He says when outsourcing, if a vendor is unwilling to share in the project risk with the host company, then a yellow flag should go up regarding that vendor’s ability to complete the job. The larger the project, he says, the more risk should be shared.
“”Companies are getting smarter before they pull the IT project trigger,”” Andriole says. “”That’s a good thing, as capital IT spending will be anemic throughout 2003.””
The survey showed 43 per cent of respondents do not pay extra to a contracted vendor for excellent outsourced performance/less for poor performance. Another 23 per cent stated they do reward and punish accordingly, while 34 per cent were uncertain.