Total cost of ownership – you’re doing it wrong

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By Glenn Saunders – IT and Finance departments everywhere love to use the total cost of ownership comparison when evaluating a buying decision. This practice is particularly common when applied to software purchases. How much is this software application going to cost over the next five years? What are the expected benefits, both soft (qualitative) and hard (quantitative)? The problem with the introduction of cloud based software applications is that it removes some of the need for IT, both from a resource standpoint and from a hardware perspective.

The problem with the traditional TCO calculation with regards to cloud applications is that it is a complete different paradigm from traditional on-premise software. Cloud software empowers business owners to exact great transformational change within an organization. A direct comparison to older on- premise software does not include the functionality deficit that is inherent in a legacy software system. IT technical debt refers to the IT resources necessary to maintain the application, keep it updated and make sure the application functions as needed by the business. The problem with that approach is that IT is not delivering new functionality or features to help the business continue to improve. IT is simply stuck maintaining an application versus delivering actual business value. That means that those IT salaries are fixed overhead as long as companies continue to invest in on-premise software.

With Cloud computing, IT can deliver true business value with new configuration, workflows, or processes which help the business adapt and improve. IT is not responsible for keeping the application up to date or backed up. The vendor handles that for the business. IT resources become engaged in the business and focus on delivering added value to the company.

It is truly a new paradigm when considering software. In an article from industry analyst Phil Wainewright (http://diginomica.com/2016/03/30/if-youre-comparing-cloud-tco-you-asked-the-wrong-question/), he outlines the three flaws in using a traditional total cost of ownership calculation for software purchases. To summarize, he states that assuming or accepting similar outcomes are the first two flaws with projecting a static outcome being the final flaw. What that means is that a new cloud software implementation should be transformative, continuous, and improve the digital connectivity of the organization.

Additionally, Wainewright outlines that “The cloud should not merely be a new location for your apps and data but should also allow you to transform how your business operates in significant ways.” The cloud software being evaluated should offer the business a more agile, connected application that can react to business opportunities and challenges.