ROI vs. TCO

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A colleague sent me this article about using ROI to justify IT investment requirements to business managers/leaders. Some follow on discussions have opened up an old debate about TCO versus ROI to justify IT spending in the face of potential savings. Since the inception of our Storage Economics work at HDS in 1999, I have always been a big proponent of ROI. For all the same reasons as defined in the article, ROI is a valuable tool when competing with other internal spending/funding initiatives. ROI can be a single measurement that management can use to contrast investment options from IT, marketing, new properties, R&D or whatever companies spend money on. So when you have to compare and compete, ROI is an excellent method.

For the first 5-7 years of doing storage economics (and even hypervisor economics), our tools and methods centered around ROI methods and calculations. Our earliest work was designed to help IT planners build business case justifications for new investments and architectures. It seems to me that around the time of the global economic crisis (also concurrent with an acceleration of data growth and storage demand), there was a subtle shift from ROI to TCO work as our preferred method. Perhaps this is/was a personal preference, but in my work around the world, reducing unit costs of things (TB, VM, VDI, Mailboxes, Oracle instances etc.) has been paramount. And here is why:

  1. IT budgets are relatively flat, or increasing only slightly (if you follow IDC check out report #12 “Research Report – 2013 IT Spending Intentions Survey”)
  2. Storage and VM demand is anything but flat. Most of my customers indicate a 40% year on year growth in storage, VM or VDI

So, with a nearly flat budget and a 50% growth in IT resources, what is to be done? The answer is to track and actively reduce unit costs. This older blog post has a diagram to show the concept.

I tend to see that a 30% year on year of TOTAL unit cost reduction can allow most organizations to hold a relatively flat OPEX and CAPEX budget. This is why TCO is such a critical management message. So in most conditions, TCO and ROI methods can co-exist to tell a compelling storage. Investments to drive down unit cost (preserving budgets) and ROI to compete head-to-head with other company initiatives. So instead of a versus arrangement, the best approach is a combination of both.

 

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2 comments on this post.
  1. Ulf Mattsson:

    Can you position security and privacy in relation to ROI vs. TCO?

  2. David Merrill:

    Ulf, thanks for the question. We see that security and privacy (as well as encryption) of data and storage are part of the total cost of storage. These efforts (and investments) to secure, protect and encrypt data are not free, and have to be included in any TCO model where these features are present. This old blog post talks about these points. You can also download the full paper that outlines all 34 costs here.

    Since this is a cost category, you can also perform an ROI to justify investments, or additional investments needed to provide the security that you have. You need to balance the investment against the cost of the risk that your company faces if the data is not properly protected. See my blog post on the cost of risk and ALE here.

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