So Let’s Do A TCO
by David Merrill on Aug 23, 2011
For years I have encouraged clients to ask for TCO (Total Cost of Ownership) data when they create requests for purchases (RFP, RFI, ITT, etc). Customers need to ask vendors for more than just the price, they need to ask for the total cost. Lately, I have seen more of these requests come in from customers around the world—nothing like a global recession to push for more cost transparencies and actionable plans to reduce total costs.
Best in TCO models/requests need to have three steps: Identify, Measure, and Reduce.
Identify the costs – Within storage economics we have defined some 34 different costs. This paper outlines each of these costs, and this blog entry compares the storage costs to hypervisor costs. If someone asks me to help build a TCO, I need to know what cost elements will be going into the TCO. Out of the 34 cost categories, the most popular tend to be:
a. Hardware depreciation
b. Software depreciation
c. Hardware maintenance after warranty
d. Software maintenance after the warranty period
e. Cost of growth or upgrades
f. Power and cooling
g. Floor space
h. Administrative labor
i. Migration costs
j. SAN costs
k. Long distance and local circuit costs
l. Data protection costs
m. Disaster protection costs
n. Scheduled or unscheduled outages
o. Provisioning time
p. Procurement time
Measure – In order to build the TCO after knowing the categories, we have to have some local parametric data to create or measure the TCO. If power and cooling is to be included, then I have to know the local cost per kilowatt hour of electricity. If administrative labor is included, then the annual labor rate (fully burdened) is required.
In some cases, people are interested in TCA (Total Cost of Acquisition) and not TCO. In this case the top 5 (above) would only be considered, since these are the common capital expenditure (CAPEX) costs.
I have some very cool predictive modeling tools that I use to approximate TCO, but only when I know the country of origin, and the types of costs to be included. I also need to know the total storage capacity, average age of the assets, and the relative growth rate of the storage over the past few years. With these few pieces of data, I can build baseline TCO models, and when I know the proposed solutions, I can further predict TCO behaviors over time.
Reduce the Costs – In a response to the tender, vendors need to map or correlate how their solution will reduce the customer’s cost. The customers have to identify what costs are important, and the vendors need to correlate their solution to those costs. This is surprisingly absent from the TCO process. I cannot be clairvoyant and guess what types of money a customer wants to include or reduce in the TCO process, but if I do have that information, the correlation of a particular solution can be made against those costs.
The following is a simple TCO model, built for a customer that wanted a six year TCO for a proposed storage replacement. The types of money included depreciation expense, maintenance (HW and SW), professional services, power and cooling, floor space and labor for management. The customer chose the types of money, and the sales team had to define the solution and overall price. The efficiency of the design (with virtualization, thin provisioning, tiering, archiving) is demonstrated in a cost per TB/year that the customer can compare to other vendor proposals.
A common mistake I see is people confusing TCA with TCO. There is nothing wrong with TCA—it tells an important CAPEX story—but it may only be 15-20% of the TCO. In the example above, the labor will be more than the HW and SW purchase price, and power/cooling will be about half of the purchase price. Compared to other proposed architectures, the customer can now review side-by-side price and cost comparisons, and make an intelligent solution as to which architecture is the lowest price and lowest cost of ownership.
In creating effective RFI or ITT requests with TCO as requirement, be sure to identify your costs, provide parametric data to measure the costs, and put the burden on the vendor to show you (the customer) how their solutions will reduce your costs. This is the best recipe to purchase systems and solutions that provide critical functionality at the best price.
Comments (3 )
[...] grow the VM budget or change VM demand. Measuring and taking steps to reduce the unit cost or TCO–per-VM is an essential business [...]
[...] Defining the costs and measurements correctly will allow you to find the cost problem areas in your TCO, and that will lead to choosing the appropriate corrective action, or investments to reduce the [...]
[...] may be more expensive than modular storage, but don’t let that lead you down the wrong path. See David Merrill’s most recent blog post on TCO, in which he explains that acquisition cost is only a fraction of the total cost. [...]