Database Technology and Information

Management I

Total Cost of Ownership Analyses

Semester Thesis

at the Oekreal School of Business Zurich

Prof. Dr. Klaus R. Dittrich Prof. Dr. Kurt Bauknecht

Presented by: Erik W. Marke, cand. MBA

Frauenfelderstrasse 82, 9548 Matzingen, Switzerland

(Accepted / Formal: rejected) Content: Place and Date: Proof-reader: Conradin Rüegg, MBA

Table of Contents

1. INTRODUCTION 3 1.1 Terms 3

1.2 Questionnaire 3

1.3 Objectives 3

1.4 The TCO-Model 4

1.5 The Profit Center approach 5

1.6 Limitations of TCO 5

1.7 Delimitation to others 5

2. ANALYSING AREAS OF COSTS -- BUDGETED (DIRECT) COSTS 6 2.1 Definitions of Budgeted (Direct) Costs 6

2.2 Hardware and Software 6

2.3 Management 8

2.4 Support 11

2.5 Development 14

2.6 Communications fee 15

3. ANALYSING AREAS OF COSTS -- UNBUDGETED (INDIRECT) COSTS 16 3.1 Definitions of Unbudgeted (Indirect) Costs 16

3.2 End-user costs 16

3.3 Downtime 17

4. CONCLUSION 19 4.1 Is There a Productivity Paradox? 19

4.2 IT Remedies 20

5. APPENDIX 22 5.1 Glossary - By Category 22

5.2 Illustrations 25

5.3 Literature 25

1. Introduction Total Cost of Ownership Analysis 1.1 Terms Side 3 of 1

1. Introduction

1.1 Terms CASE Computer Aided Software

Engineering CEO Chief executive officer CFO Chief financial officer CIO Chief Information Officer COO Chief operations officer DCO Data Center Operation DT Desktop EIS Executive inform. system EUC End-user Computing HR Human resources IC Information Center IE Information Engineering IS Information systems IT Information Technologies JITT Just-in-time training LAN Local Area Network LOB Line of business

MIS Management Information System

NC Network computer NETPC Network PC NIC Network interface card NOS Network operating system NT New Technology P&P Policy and procedures PC Personal Computer PDA Personal digital assistant ROC Real Ownership Cost ROI Return on Investment ROM Return on Management TCO Total Cost of Ownership TOC Total Ownership Cost TQM Total quality management WAN Wide Area Network WBT Windows Based Terminal WWW World Wide Web (Internet)

1.2 Questionnaire For such an innocuous bit of corporate scenery, PCs can generate surprising controversy when it comes to figuring out how much they cost. Ask the head of marketing, and he might check his purchase order and toss the sticker price at you. Ask the CIO, and he might add a few grand to the purchase price to account for technical and help desk support. Ask a user, and she might point out that the biggest cost is the time she wastes cajoling it to do what she wants. But here’s the scary part: The only thing business executives know for sure is the price keeps going up. "The fear a lot of CEOs have is that information technology [IT] costs1 are growing out of control without anybody being aware of them" (Bill Kirwin, Gartner Group Inc.’s, Oct. 1997)

1.3 Objectives

Much has been written about what is wrong with data processing today. There are backlogs of several years. It takes too long to build systems, and the cost is too high. The difficulties of maintenance are outrageous. Management cannot obtain information from computers when needed. Many programs are fragile spaghetti code. Problems in data processing prevent the rapid introduction of new business procedures.2

1 Gartner Group's Personal Computing Policies and Strategies Research Note SPA-140-22, April 26, 1996 2 James Martin, Information engineering: a trilogy, Book 1, Prentice Hall New Jersey 1989

0

10000

20000

30000

40000

50000

1987 1996 2000

Figure 1: five-year TCO

1. Introduction Total Cost of Ownership Analysis 1.4 The TCO-Model Side 4 of 1

Today, computers are assuming more important roles in business, governments and the military. We have entered the age when computing and information systems are strategic weapons, not a backroom overhead. The term mission critical3 system and strategic system have become popular. There are many examples of corporations s growing faster than their competition because they had better information systems. In cases, corporations have been put out of business by competition with better computing recourses. IT investments, like all business decisions, are based on economic value. Determining economic value includes weighing at least three factors: economic benefits, risks, and costs. The benefit and risk factors used to value IT investments vary from firm to firm and industry to industry. This article focuses on one important part of the overall value picture: cost. Total Cost of Ownership (TCO) is a model that helps enterprises understand the direct and indirect dollar costs associated with owning and using an Information Technology (IT) component throughout its lifecycle. You can think of TCO as the sum of all the ”little costs” that go into acquiring, installing, managing computers, networks, applications and End user Cost (EUC). The collection of costs can be partitioned into a TCO Model and used with a management methodology4 to form a decision support tool. The combination of a TCO Model with a methodology provides an IS professional with the understanding of all costs associated with the computer systems, and a decision making tool on how to best to manage and improve the systems, delivering more value to the business from the IT investments.

1.4 The TCO-Model Looking at IT costs using a TCO model acknowledges that the costs of hardware and software are connected to other costs such as support, training, and downtime. This thesis tries to explain and make you aware of TCO model that makes the Total Cost of Ownership more easily measurable and directly usable to create actionable IT improvement plans. What is TCO, how can TCO be analyzed? TCO is a model that helps managers of Enterprise Systems understand and manage the budgeted (direct) and unbudgeted (indirect) costs incurred in owning and using an IT component throughout its lifecycle. Analyzing TCO is always an important step. Even if the current strategy in your organization is "no change, no investments," TCO will tend to grow because external business variables are constantly changing as you are faced with maintaining an appropriate level of service. Much has been written about the rising cost of personal computers over the past few years. For example, costs have tripled during the last ten years while the quantity of information and level of service has increased exponentially. The way that business is performed and the way people work and interact has also changed dramatically. Ten years ago, individuals could not create production-level documents

3 To Lower Ownership Costs, Improve Management, by Paul A. Strassmann, Computerworld, July 14, 1997 4 Interpose, Inc./IDC - 1997

Diagram 1: TCO area's

1. Introduction Total Cost of Ownership Analysis 1.5 Profit Center approach Side 5 of 1

and presentations, communicate and collaborate electronically, maintain remote office connections, or most importantly, manage and share information. The objective of any TCO analysis is to maintain or optimize individual productivity while lowering costs. Most costs are associated with management and technology support by IS professionals, and the hidden costs5 of end-users managing and supporting their own computer systems. There is a great opportunity through TCO management to understand and reduce these costs since much of the costs are labor-related -- driven by processes, training, and tools. Often overlooked when analyzing costs is the fact that as costs go up, there is a proportional increase in individual productivity and flexibility. Conversely, reducing too many costs (e.g. training) increases downtime and support calls.

1.5 Profit Center approach To help organizations identify all the variables connected to the cost of IT systems, direct and indirect cost classifications are divided into cost categories. Categories are granular enough to be actionable, i.e. Hardware and Software, Management, Support, Development, Communications fee, End-user, Downtime6. These chargeout should lead managers to assist with additional aspect of revenue decisions about computer use – from a perspective of their own department and the whole company. An advanced chargeout system, designed to encourage both users and the providers of computer services to make wise decisions, lays the groundwork for the smooth operation of IS as a profit center.

1.6 Limitations of TCO With TCO there is no talk about revenue, it doesn’t talk about the business value and contribution of IT. Executives—both IS and financial—who wish to put this tool to work must first figure out what it can and can’t do. Although TCO analysis is one valuable tool to help keep IT costs under control, no total cost of ownership model can determine how to use IT wisely throughout the enterprise. TCO analysis can go awry if not used in balance with other financial analysis7 models, and experts are quick to point out its limitations.

1.7 Delimitation to others TCO One of the strictest standards for computer display AEF and AMF emission levels in the world. This standard is also known as TCO. TOC - Total Ownership Costs This initiative was intended to introduce economic observations to point out the cost to own a PC, this did not include any figure for end-user nor downtime cost.

5 Interpose’s TCO Model for Understanding All Information Technology Costs and Benefits, A Technical

White Paper, October 1997 http://www.cio.com/archive/090197_meta.html

6 Cost Of Downtime -- Financial firm saves by tracking system disruptions and non-productive use May 12, 1997, Issue: 630, Section: IT Management, http://www.techweb.com/se/directlink.cgi?IWK19970512S0070

7 How to set up your own ownership model, Bill Kirwin, Gartner Group Inc., CIO Magazine - Enterprise - October 15, 1997

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.1 Definitions of Budgeted (Direct) Costs Side 6 of 1

2. Analyzing areas of costs -- Budgeted (Direct) Costs8 Direct costs can be obtained through analysis of typical IS budgets. But, upon initiating a TCO assessment in an organization, the first realization is that organizations often do not have a clear understanding of their total budgets. Most organizations do not track IS costs accurately, lacking detailed information on asset location, total head count, and labor expenditures. A well-defined TCO model helps avoid these shortcomings.

2.1 Definitions of Budgeted (Direct) Costs Direct or budget costs can be obtained through analysis of typical IS budgets. But, upon initiating a TCO assessment of an organization, the first realization is that organizations often do not have a handle on their total budgets. Most organizations do not track IS costs accurately because they often do not know how many assets they have and their location, do not know total headcount or where labor is being expended. All of this information can be discovered through a little research and an organizational framework provided by the TCO Model on where to locate and record relevant costs. The TCO Model and associated TCO Lifecycle cost management methodology provides a framework to investigate total direct costs and document them in one place.

2.2 Hardware and Software The minicomputer investment cycle9 inaugurated the proliferation of computing capacity. It initiated the shift from disciplined mainframe computing to improvised computing whenever people could afford to purchase their own equipment. Hardware and Software Costs are the annual capital expenditures associated with PC and network hardware and software. Included are the acquisition fees (depreciated over three years using straight-line depreciation), upgrade, update, and disposal fees for the assets. Assets include PCs, laptops, servers, peripherals, hubs, bridges, routers, switches, printers, scanners, and network wiring. Cost Sub-Category Definition Hardware Costs Annual expenditures on new and upgraded client,

server, and network hardware.

Acquisition10 and Disposal The annual capital expenditures associated with the acquisition and disposal of computers, peripherals (printers and scanners), and network hardware (hubs, bridges, routers, and switches). The acquisition fees for clients and servers include initial computer, memory, storage, and applications. As well, a fee is included for asset disposal fees Acquisition costs are amortized over a three year based on the original purchase price. For a benchmark analysis, all of the assets are assumed to be

8 To Cut Costs, Find the Costliest Users, by Paul A. Strassmann, Computerworld, December 8, 1997 9 The Squandered Computer, Evaluating the Business Alignment of Information Technologies, by Paul A.

Strassmann 10 Operations Is Mostly About Managing Change, June 25, 1997

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.2 Hardware and Software Side 7 of 1

replaced on a three year basis, meaning that each asset has an acquisition cost equivalent to 1/3 of the original acquisition cost. When calculating the baseline (actual costs), the analysis should include a single year’s worth of depreciation expenses for all assets that are currently not fully depreciated. The depreciation fees are recorded using a three year straight line depreciation. New assets (purchased within the analysis year) should utilize a full year of depreciation expense regardless of when the asset was brought into service. Assets that are currently fully depreciated should be included in the analysis of total assets for total cost analysis, but, for the baseline, analysis will not have any costs indicated in acquisition costs because they are fully depreciated. Thus, if assets are in service longer than three years, the organization will have acquisition costs lower than the industry average benchmark figures (although other costs such as upgrades and repairs may be higher). Lease fees are not included in the acquisition expenses and are handled in another category (lease fees) below.

Memory The annual capital expenditures for upgrades to computer memory. The memory upgrades are expensed.

Storage The annual capital expenditures for upgrades to computer hard disks and other on-line network storage devices. The storage expenses are expensed.

Peripheral Upgrades The annual capital expenditures for computer peripheral device updates and upgrades including adding a CD-ROM drive to a computer, multimedia accessories, and printer memory. The peripheral upgrades are expensed.

Connectivity Hardware11 Upgrades The annual capital expenditures for upgrading and

updating network hardware including such items as network cabling network cards, and adding ports to routers. The connectivity hardware upgrades are expensed.

Other Hardware The annual capital expenditures for spares. This fee is expensed.

Software Costs12 Annual capital expenditures on new and upgraded client and server software. Software is expensed in the year the analysis is being performed. Maintenance contracts are not included.

Operating System The annual capital expenditures on new and upgraded operating system licenses for the desktop and servers.

Application Software The annual capital expenditures for new and upgraded off-the-shelf applications including word processors, databases, spreadsheets, financial, accounting, manufacturing, CAD/CAM, presentation, contact

11 Network management, CIO Magazine - June 1, 1997 12 IT asset management, Asset Appreciation, CIO Magazine, September 15, 1995

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.3 Management Side 8 of 1

management, vertical applications, and other business software. Included are expenses for development tools. Software fees are expensed.

Utility Software The annual capital expenditures on new and upgraded software used to help manage the desktops or network including network and systems management software, security, virus protection, backup and restore, disk optimization, performance tuning, screen savers, and other helpful tools. Also included in utility software are programming languages, program components, modeling software, test tools, configuration control programs, and documentation tools.

Connectivity and Communication Software The annual capital expenditures on new and upgraded

software used to connect users and to enable sharing of information across the network, beyond what is included in the operating system. Such software includes messaging software and remote connectivity software.

Monthly Costs Monthly capital and lease expenses for hardware, software, and supplies

Leased asset fees The annualized lease fees for all assets including hardware such as servers, clients, printers, hubs, bridges, routers, and switches, as well as leased software.

Other monthly costs The annualized capital fees for computer supplies such as diskettes, CD-ROM's, backup tapes, toner cartridges and other expendable.

2.3 Management As departments where building and managing there own environment. As during the past years systems inter-connectivity were established suddenly, there was the need to pinpoint bottlenecks or track down hardware troubles amidst the labyrinth of servers, clients, routers, cable and middleware is a challenge not for the faint of heart. There where often sophisticated documentation13 or standards available from this different departments.14 According to Janet Butler the average Fortune Service 500 company planned to invest $1.7Mio. in networking in 1994 or more than twice $737,000 reserved by the average Fortune Industrial 500 company.15 The communication revolution promise of "anytime, anywhere" presents a distinct problem for network managers. The problem is that users will begin expecting , indeed demanding, services that cannot yet be delivered. Management is the IS direct labor expenses and outsourced fees of managing the network, computer systems, applications, and storage infrastructure, as well as

13 Capers Jones, The Year 2000 Software Problem 14 Janet Butler, Enterprisewide Network Management, Computer Technology Research Corp., 1995 15 Enterprisewide Network Management, side 153

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.3 Management Side 9 of 1

managing the users ability to access these resources. The successful management of the infrastructure forms the basis for a solid business computing platform. Management expenses are derived from the labor expenses of network and desktop administrators, as well as network management outsourcing fees. Expenses are the annual labor fees (headcount performing the task * rate) for the analysis year. Cost Sub-Category Definition

Network Management16 The annual labor expenses for maintaining and optimizing availability of key network resources to users. These resources include access to the systems, network, communications, information management and sharing, as well as printing. Tasks in this category include advanced support services, optimization, and administration.

Troubleshooting17 and repair (Tier III support) The annual labor expenses for technicians and

administrators in identifying and resolving failure, fault, and accessibility support issues with the network, computers, operating systems and applications. Includes break-fix labor expenses.

Traffic management and planning The annual labor expenses for pro-actively monitoring,

interpreting, planning and balancing18 the load placed on the network infrastructure.

Performance tuning The annual labor expenses for pro-actively monitoring, interpreting, planning and balancing the performance of networked systems and applications.

User administration (adds, moves, and changes to users) The annual labor expenses for controlling user

accessibility and restriction to network and application resources. Tasks include adding new users and resources, moving users to new groups, or changing user profiles.

Operating system support The annual labor expended in managing the operating system including settings, drivers, and licensing.

Maintenance labor The annual labor19 expended for routine tasks that are performed on a scheduled or interval basis to maintain accessibility and performance. This can include tasks such as routine cycling of applications, maintaining expired passwords, and deletion of e-mail logs. File and disk maintenance is not included.

Tier II support labor The annual labor expenses for resolving issues with systems, networks, and applications that could not be resolved by help desk tier I personnel, and are not yet ready to be escalated to Tier III support personnel. The

16 Gartner group Inc., Operations Is Mostly About Managing Change, June 25, 1997 17 Jeff Bliss Systems management made easier, TechWeb, November 10, 1997, Issue: 762 18 Gartner Group., Enterprise Planning Reduces IT Unit Cost by 75 Percent, October 28, 1997 19 Paul A. Strassmann, Information Productivity, Strassmann Inc. 1997

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.3 Management Side 10 of 1

Tier II resources are utilized when calls cannot be resolved through standard solutions, require a greater in-depth knowledge of the systems, or require dispatch to the desktop or problem causing asset.

Systems Management The annual labor expenses for managing the physical computer systems, applications, and network. Tasks include evaluation, deployment, and on-going management.

Systems research and planning The annual labor expenses for identifying infrastructure

needs, reviewing configurations, setting standards, researching options, as well as identifying and documenting planned changes. Expenditures are for servers, clients, networks, and off-the-shelf applications.

Evaluation and purchase The annual labor expenses for testing servers, clients, networks, applications, and systems prior to rollout, and the direct IS labor associated in supporting procurement efforts, including the support of legal and purchasing departments.

Software licensing20 and

distribution The annual labor expenses for deploying new software, updating and upgrading existing applications and operating systems, monitoring usage and the metering of available licenses

Asset management The annual labor expenses for inventories, asset identification and tracking, asset database management, change recording, and reconciliation, as well as managing automated asset management systems.

Application management The annual labor expenses for on-going management of applications including configuration control, access management, and launch.

Security and virus protection The annual labor expenses for detecting or preventing

security violations or virus infection, and the recovery from such violations or intrusions.

Hardware Configuration21/Re-configuration (adds, moves, changes to assets) The annual labor expenses for re-configuring existing

solutions within the network including adding sub-components, upgrades, physical moves or configuration changes. Items include system upgrades, performance enhancements, topology changes, switched network changes, asset location, and other physical or logical changes and setups to the hardware and settings. Software upgrades to applications and operating systems are not accounted for here, instead they are recorded in Software licensing and distribution.

20 CIO Magazin, IT Costs, PC LAN Costs JUNE 15, 1996 21 J. Golterman, Gartner group Inc., Sales Leadership Strategies (SLS), September 26, 1997

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.4 Support Side 11 of 1

Hardware Installation The annual labor expenses for installing and deploying new hardware including servers, clients, peripherals, communication devices, and networks. As part of the installation, it is assumed that the replaced assets are disposed of using labor accounted for in this category.

Storage Management22 The annual labor expenses for managing the desktop and network data and storage including file system organization, database management, local hard disks, server hard disks, centralized on-line storage devices, optical storage, hierarchical storage management systems, archiving and backup/restore systems. Only client/server storage management costs should be considered.

Disk and file management The annual labor expenses for optimizing hard disk storage and file systems. Expenses include management of directory trees, disk de-fragmentation, and disk maintenance.

Storage capacity planning The annual labor expenses for monitoring, managing, and optimizing on-line and off-line storage.

Data access management The annual labor expenses for providing user availability to information including in-scope database management, file access, and remote server access.

Backup and archiving The annual labor expenses for the backup of network and desktop data, restoring lost files or disks, and the archiving of data to tape.

Disaster planning and recovery The annual labor expenses for building disaster preparedness plans including backup and restore procedures, tape management plans, hot-site planning and preparation, record keeping, and team organization

Repository management The allocated annual labor expenses for managing the central disk or tape repository.

Outsourced Management Fees The annual fees associated with outsourcing23 any of

the Management labor costs. The outsourced categories typically include planning, installation (migration rollouts), Tier II support, inventory, asset management24, repository management.

2.4 Support Support costs are the direct labor expenses (IS, end-user, and procurement) and fees associated with supporting the network infrastructure and users. Labor and fees include help desk support (tier I), maintenance and support contracts, training, travel,

22 Gartner Group Inc., Enterprise Planning Reduces IT Unit Cost by 75 Percent, October 28, 1997 23 Strassmann, The Real Problem with Computers, Harvard Business Review, September-October 1997 24 Caryn Gillooly, Return On Assets -- Asset-management software can cut your total cost of ownership. It

can also boost your speed and sharpen your customer focus, TechWeb, December 08, 1997, Issue: 660 CIO Magazine, IT ASSET MANAGEMENT, September 15, 1995 September 15, 1995

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.4 Support Side 12 of 1

purchasing, vendor management, and management overhead. Support costs are annual labor expenses and fees for the year the analysis was performed. It is important to collect as much information as possible about how things relating to the support mission are currently being done. In the early stages, keep in mind that one of the key issues is whether the benefits of creating the new, formal support are worth the costs. To answer that question, it is critical to look at the cost of the informal system. Without an existing help desk, it may be difficult to develop a mechanism for collecting this information. Consider talking to users to get their perceptions, expectations, and preferences of help-desk services as well as collecting information from company management and, if one exists, the Information Services or Information Technology department. It is also important to gather information about what technology is being used and how that technology is being applied. A company where the users actually program within a variety of applications may require a very different help-desk model than one where the word processor has only begun to replace the typewriter. Cost Sub-Category Definition

Operations Labor25 The annual expenses for the overhead labor associated with running a computer and network infrastructure.

Administration The annual labor expenses for clerks and assistants that support administrative staff, support staff, IS department and general managers, as well as IS executives.

Management The annual labor expenses for IS department, general, and executive management.

Casual Learning26 (IT) The annual labor expenses by IS professionals outside of formal training programs to learn computer, network, and storage systems, as well as IS and end-user applications.

Vendor Management The annual labor expenses for working with and managing hardware and software vendors.

Misdiagnosis The annual IS labor expenses for IS resources spending support time on issues that were user error, not real faults.

Training Course Development The annual labor expenses for designing, developing, and

testing IS and end user courseware.

IS Training (delivery and time) The annual labor expenses for delivering IS courses, as

well as the IS time spent attending courses.

End User Training (delivery) The annual labor expenses for the delivery of training

courses to end users on infrastructure systems and applications.

25 Paul Strassmann's, The Squandered Computer, Will big spending on computers guarantee profitability? 26 D. Cappuccio, W. Kirwin, L. Pawlick, Total Cost of Ownership: Reducing PC/LAN Costs in the

Enterprise, Managing Distributed Computing (MDC), Gartner Group Inc., February 9, 1996

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.4 Support Side 13 of 1

End User Training The annual labor expenses for the time spent by end-users in infrastructure systems and application training.

Travel Time The annual labor expenses by IS professionals in travel time to support remote/branch offices, attend training sessions, attend trade shows, and visit vendors.

Purchasing The annual labor expenses by purchasing and legal in planning, supporting, and implementing computer systems, network, and applications purchases including the negotiation of contracts, site licenses, and individual acquisitions.

Other Operations Labor Costs Annual labor expenses for miscellaneous overhead items

such as user group or IS newsletter production.

Operations Fees The annual fees for operations such as maintenance and support contracts, travel, and training.

Maintenance contracts The annual fees for outsourced maintenance (break-fix) contracts. When calculating actual costs, organizations that pay for these fees on a one time basis for multiple years should only account for the allocation of costs in the analysis year.

Support contracts The annual fees for outsourced Tier I help desk support services.

Training Course/ Certification Fees The annual fees for training class and supply fees,

certifications, testing fees, and courseware.

Travel The annual fees for airfare and other transportation related to in-scope IS business travel.

Purchasing The annual allocated charge-back fees paid to purchasing or legal departments for in-scope IS purchases.

Other Operations Fees Annual fees for overhead items such as user group or IS newsletter production.

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.5 Development Side 14 of 1

Help Desk27 (Tier I support) Labor Costs The annual labor expenses for Tier I help desk

support calls. For benchmark analysis, the cost information is based on the activity based cost of supporting the client/server environment (calls per year for all assets * avg. call duration * burdened labor rate).For baseline analysis, the cost information is activity based, but may be collected based on headcount (usually when the Tier I for client/server infrastructure is easily separated from out-of-scope systems), or on call analysis (when support resources hold multiple support roles)

2.5 Development Unfortunately, many products still come to market with obvious usability deficiencies. Many of these products are developed with little early consideration for user interface. Often the most significant attention to product usability comes during the later part of the software development process, sometimes more as an afterthought than as a significant planned activity. Not only does it cost more to make coding and documentation changes later in the cycle, there also is considerable less time to validate the acceptance of the user interface Frequently there these developments are not within time finished. So under the pressure of time to market (TTM), the last phase of development are getting shortened. So there will be still some major faults left. Gartner Group28 Inc., Stamford, Conn., estimates that more than 80 percent of the world's largest companies either will have or will be planning a data warehouse by the end of the year. Some of those companies are constructing enterprisewide, multiterabyte data collections, while others are building smaller scale data marts to meet the needs of individual departments. Almost all will be using the services and expertise of resellers to help them. Development costs are the annual IS labor expenses and fees for the design, development, test, documentation, and maintenance of non-business applications for the computing system infrastructure. In-scope applications include systems management programming, and development/customization of communication and productivity software. Activities and fees in this category are associated with new applications, integration, customization, and maintenance. Business applications, those programs that generate, track, field, or manage business revenue and/or are considered mission critical, are considered out of scope in the standard costs, and should be considered out of scope in actual costs analysis when doing comparisons of Benchmarks to Baselines. Cost Sub-Category Definition Development Labor The annual labor for the design, development,

documentation, test, and maintenance of non-business applications.

27 Gartner Group's Software Asset Management, Lowering Help Desk Costs With LAN-Based Inventory

Tools, Research Note KA-AMT-426, August 22, 1997. 28 Gartner Interactive Home, http://gartner12.gartnerweb.com

2. Analyzing areas of costs -- Budgeted (Direct) Costs Total Cost of Ownership Analysis 2.6 Communications fee Side 15 of 1

Design and development The annual labor for requirement definition, architecture development, planning, prototyping, and coding of non-business applications.

Testing The annual labor for developing or planning test tools,

developing test plans, managing test lab creation and maintenance, testing, and documenting issues.

Documentation29 The annual labor for configuration control and technical

writer documentation of non-business applications. Development Fees The annual fees paid to outside service providers and

consultants for the design, development, documentation, test, and maintenance of non-business applications.

Design and development The annual fees for requirement definition, architecture

development, planning, prototyping, and coding of non-business applications.

Testing The annual fees for developing or planning test tools,

developing test plans, managing test lab creation and maintenance, testing, and documenting issues.

Documentation The annual fees for configuration control and technical

writer documentation of non-business applications.

2.6 Communications fee

Network computing puts the network at the center of a simplified universe. Rather than rely on thousands of variously configured individual desktop PCs, management, maintenance and upgrades occur centrally through the network and servers. The communications fees are the annual expenses paid for lease lines, on-line access fees, remote access services, and WEB hosting fees. Fees are assessed for client/server functions only. Data center fees for communications should be allocated accordingly.

Cost Sub-Category Definition Communication Fees The total of annual expenses for lease line fees, on-line

access fees, remote access services, and WEB hosting fees.

29 CIO, New Year's Evil, Column - Jan. 1, 1996.

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3. Analyzing areas of costs -- Unbudgeted (Indirect) Costs

3.1 Definitions of Unbudgeted (Indirect) Costs Costs generated by end-users providing IS support to themselves and their peers, so-called indirect costs, are rarely measured by IS organizations. But it is the indirect costs that can grow unchecked as IS budgets are slashed and the burden of IT support is shifted directly to end-users. According to the Interpose research, the average organization has more than 50 percent of total IT costs allocated to indirect expenses. Most alarming is that over the past ten years these costs have tripled, and the majority of cost growth has been outside of traditional IS budgets. Indirect costs are harder to quantify for most organizations. Costs can be estimated by reviewing help desk records to determine downtime and by surveying users to determine where they go for support (help desk or peers) and self-support time. The TCO model and associated TCO lifecycle cost management methodology assist in organizing research and quantifying indirect costs. To define the TCO model further, the direct and indirect cost classifications are divided into cost categories. These are defined to easily capture costs so that research can be performed on the industry average cost of ownership, and individual organizations can research and record costs easily. It is also important to develop a model where cost categories and sub-categories are granular enough to be actionable, i.e. Products, best practices, or training can be applied against the categories and the impact can be measured.

3.2 End-user costs Top management only began to inquire about the full life-cycle cost of computing when they recognized that computer ownership increasingly includes costs that show up only in the users' operations. Today, user-incurred costs such as "futzing"30 (wasting time on PCs), improvised learning, assistance from fellow employees and end-user attempts to become computer experts are showing up in the TOC estimates published by consultants and vendors. This indirect expense is often hidden and is an indirect expense to IS. The responsibility and hours in performing these tasks is sometimes borne by end users by design, where certain end users are designated with IS functions to better support business units and remote offices. At other times the expenses are the result of budget cuts to IS resulting in transitions of labor costs from traditional IS personnel to the end users. In either case, a study of the total cost of ownership must include the IS labor expenses that are being performed by end users. Such costs typically include tier II support, maintenance, troubleshooting and repair, installation, training, backup, and certain development functions (non-business or mission critical). When investigating the End User IS expenses for a TCO Baseline (actual cost) data collection, end user surveys are used. In these surveys, end users are asked to provide information on where they obtain IS services, and how much they perform themselves or for others. As well, IS management is queried to determine how much ”official” support is provided by end users to support business units, mobile workers, and remote/branch offices, common areas where end user IS expenditures are high. Cost Sub-Category Definition

30 Further information in the appendix

3. Analyzing areas of costs -- Unbudgeted (Indirect) Costs Total Cost of Ownership Analysis 3.3 Downtime Side 17 of 1

Peer and Self Support The annual labor expenses of end users supporting

themselves and each other in lieu of obtaining support from the help desk or IS personnel. Typical tasks performed by the end users include troubleshooting and repair, support, maintenance, installation, training, and backup management (remote offices). Self support is performed by the users themselves. Peer support is the reliance on a knowledgeable resource, typically the unofficial ”expert” in providing support answers and in resolving technical issues.

Casual Learning (end user) The annual labor expenses of end users training

themselves in lieu of traditional and formal training programs.

”Futz” Factor The annual labor expenses of end users performing

unnecessary changes to their computer, network settings, or applications including playing with screen settings, file organization, folders, sounds, printer settings, and other unproductive configuration/re-configuration. Futz does not include playing of games or surfing the Internet. This time is not included in the average or actual cost studies.

End user scripting and development The annual labor expense of end users performing

development and customization of non business/mission critical applications (infrastructure software)

3.3 Downtime31 Downtime expenses are the annual lost productivity costs to end users of downtime, the unavailability of computing services and resources including desktop computers, servers, printers, network, applications, and communications. Downtime can be due to a user waiting for productivity impacting help desk problem to be resolved, or from an infrastructure issue due to planned maintenance or unplanned failures. Productivity losses are considered in the total cost of ownership model to measure and track downtime impacts on the end user community, providing a measuring stick for reliability and fault tolerance. Business losses are important to consider but not measured in this model because business impacts and applications are out of scope. Cost Sub-Category Definition Planned downtime lost productivity The annual productivity loss impact to end users from

planned system maintenance. This cost can be high for organizations who are 24x7 and who have systems that require productivity impacting enhancements to the servers, architecture, and desktops, or who have

31 Paul A. Strassmann, To Lower Ownership Costs, Improve Management, Computerworld, July 14, 1997

3. Analyzing areas of costs -- Unbudgeted (Indirect) Costs Total Cost of Ownership Analysis 3.3 Downtime Side 18 of 1

maintenance issues with the central resources and applications. For actual cost analysis, the planned network outages are estimated by IS professionals.

Unplanned downtime lost productivity The annual productivity loss impact to end users from

unplanned outages of the network resources, including shared servers, printers, applications, communication resources, and connectivity. For actual cost analysis, the unplanned network outages are estimated by IS professionals.

Lost productivity due to help desk resolution time The annual productivity loss impact to end users from

the wait time involved in getting support issues handled, from the call placement to problem resolution and restored productivity. When researching actual costs, it is important that only productivity impacting problems are recorded, and problems spanning non-working hours consider only those hours that effect productivity. Consideration on scaling may be considered for professionals who often work unpaid hours to make up for unproductive hours due to desktop or network problems. For actual cost analysis, it is important to separate desktop resolution downtime from network downtime to avoid double counting of productivity losses.

4. Conclusion Total Cost of Ownership Analysis 4.1 Is There a Productivity Paradox? Side 19 of 1

4. Conclusion Neither client/server, the Internet nor computer networks have so far materially improved the productivity of information handling by the premier U.S. industrial corporations. In 1996 $1,109 billions in cost of goods required the support from $301 billions in information management. In 1996 $207 billions of revenue of US banks consumed $75 billions in non-interest expense and $39 billions of staff costs. These ratios are now lower than they were in the period from 1987 through 1993. I consider these declining ratios as proof that productivity of the information handling workforce, which now accounts for 59% of US total employment, has worsened in the last decade, not improved. The time has come to face up to the facts: the stock-market analysts and the over- optimistic CEOs are misled. It's a myth that computers have measurably increased overall US productivity of information. Whatever productivity gains may have happened to increase profits took place in the factories and the warehouses. Such realization will lead to placing IT expenses under much closer financial scrutiny to make sure that costs are not only contained, but that the computerized work creates an innovative stream of new profits. Whatever productivity gains may have been achieved through computerization of office work in the last decade have been squandered by the profligate waste of human and technological resources. The bureaucratization and complexity of business processes have indeed increased, thereby creating the demand for more information processing to get anything accomplished. However, increased amounts of unnecessary work does not create wealth, whether done faster than before or not. If prosperity is to continue, we need to fulfill the promise of the Information Age. We must deploy IT so the workforce can consistently deliver more value with less effort.

4.1 Is There a Productivity Paradox? The term "paradox" is used when reasoned acts deliver results which are counter to expectations. I think that therein lies the fallacy, and perhaps arrogance, of thinking about computers as a paradoxical phenomenon. Computers are indeed a miraculous technology. Therefore, management has been led to expect delivery of fantastic gains in productivity. The press, the vendors and the consultants have reinforced such convictions. The facts are that: • There is no correlation between computer spending and profitability; • There is no evidence that during the last decade the productivity of information

work in the US has improved. I have assembled in this chapter some contrary evidence.

It is not helpful to keep talking about the persistence of a "productivity paradox" as an unfulfilled dream. It is even less constructive to wish the entire problem to disappear by arguing that the productivity gains exist, if we only knew how to measure them. Time has come to face up to the evidence that often computer productivity is not a mythical, intangible benefit but more often than not a productivity detractor. That means placing I.T. expenses under a close financial scrutiny to make sure that costs are not only contained, but that the computerized work creates an innovative stream of new profits.

4. Conclusion Total Cost of Ownership Analysis 4.2 IT Remedies Side 20 of 1

Whatever productivity gains in the application of information may have been achieved through computerization in the last decade must have been squandered by the rising bureaucratization of the US organizations and the profligate waste of resources - human as well as technological. If prosperity is to continue, as the optimists hope, we need to take advantage of what is the promise of the information age. We must deploy information technologies to create a sustained ability of the information workforce to manage the delivery of more valuable results with less effort.

4.2 IT Remedies Information costs have been rising relative to other production costs, not declining. In accounting terms this means that hard-to-control and largely fixed overhead costs have been displacing variable direct costs. The impacts on planning, budgeting and controlling of information technologies are far reaching. The pressure to reduce fixed overhead costs will mount, especially during a downside swing of an economic cycle. The likely managerial countermeasures will be: increase outsourcing of information services; license software based on usage and shift computing to where capacity utilization can take advantage of economies of scale. Within ten years the structure of the existing corporate information technology budgets will see radical changes. The enormous fixed cost of computing assets configured to meet local peak loads will be replaced by computing-on-demand from commercial utilities. Company-specific networks will be phased out in favor of carriers that will auction off bandwidth based on real-time demands for capacity. Custom-made applications requiring huge support staffs will be phased out in favor of systems configured out of standard functional modules and billed in microtransaction units. Computing will cease to be a firm-level cottage industry aspiring to self-sufficiency. Computing services will become a globally traded commodity. In the case of industrialization, the evolution from local guild-like monopolies to globally traded markets took over three hundred years and is right now in its final phase of historical development. In the case of the information economy, the evolution from local guild-like monopolies has just begun. However, the evolutionary pace will be much swifter because telecommunications technology now makes it possible to bypass the local institutional barrier to progress by offering instant cost reductions. With little effort the customer can reap the benefits of obtaining a global marginal price instead of having to pay for all of the local fixed costs. The acceleration in the acceptance of global trading in computerized services also enjoys unique advantages which the marketing in industrial goods could never realize. Network-based trades of information services can approach the conditions of "perfect competition" as closely as a classical economist could conceive. The variable transaction cost of any network services is extremely low, which means that price can be set by real-time bidding. The buyers can acquire perfect information about what they are purchasing, since the cost of trying out a service is trivial. The costs for each transaction are also very low because the metering and billing can be totally automated for less than a few microcents per event. No intermediaries are needed to assure global market access by buyers to sellers or vice versa, which eliminates most of the overhead expenses for brokers, wholesalers, insurers, bankers, customs officials and legions of purchasing agents who have always acted as a brake on trade. If endowed with a sufficiently intelligent electronic device, any consumer of services can connect directly to any supplier of services, anywhere, anytime.

4. Conclusion Total Cost of Ownership Analysis 4.2 IT Remedies Side 21 of 1

When the new evolutionary changes in the conduct of information management will materialize, we will be able to observe and measure the long heralded rise in the productivity of the information resources. It will finally take less information inputs to deliver more and better goods and services outputs.

5. Appendix Total Cost of Ownership Analysis 5.1 Glossary - By Category Side 22 of 1

5. Appendix

5.1 Glossary - By Category32 Capital: Money used to purchase/lease/rent hardware and license software to perform activities such as end-user computing, LAN connectivity, and client/server deployment.

Supplies: This line item covers consumables such as diskettes, paper and printer ribbons or cartridges.

Total Cost of Ownership: The sum of all hard, soft and hidden costs related to a particular activity such as end-user computing, LAN connectivity, and client/server deployment, measured or estimated over a period of time (we use five years).

Administration: Tasks associated with security, auditability, control and legal compliance of an activity such as end-user computing, and LAN connectivity. These include:

Asset Management: The practice of managing enterprise assets through the life cycle of procurement, deployment, upgrade and disposition.

Formal Audit: Compliance review following established EDP audit practice.

Legal: Review and position statement on contractual affairs, such as license agreements, service contracts, and lease terms and conditions.

Policy and Procedure Enforcement: Management action to facilitate the above administrative functions.

Purchasing: The procurement process, negotiation, terms and conditions, and order preparation.

Security: Protection and risk management of physical, logical and intellectual property.

End-User Operations: The time spent by end users on the non-job-related PC activities that are necessary due to the presence of PCs. In essence, end users have had "data center manager" added to their job descriptions because the typical organization has starved official technical-support head count or has not invested in labor-saving technical-support and administration tools - or both. While this component of the total cost of ownership model looks at end-user costs, it does not measure end-user productivity.

Applications Development: Because of IS head-count constraints, end users are required to shoulder more of the "applications development" burden for report generation, data analysis and work-group/departmental systems. Development tools can be spreadsheet macros, Lotus Notes, PC databases (like Paradox) or programming languages (like Visual Basic).

Casual Learning: The effort end users make to know more about a function they are using at the point in time they are trying to use that function is called "casual learning." Traditional tools for casual learning include reading manuals, information from coworkers, using a systems' help screen (e.g., the information that comes up in a box when the F1 key is pressed on a Windows PC) and utilizing trial-and-error experimentation. Advanced casual learning uses hypertext-based and multimedia-

32 Gartner Group Inc., Managing Distributed Computing (MDC), Strategic Analysis Report, D. Cappuccio,

W. Kirwin, L. Pawlick MDC: R-TCO-104, February 9, 1996

5. Appendix Total Cost of Ownership Analysis 5.1 Glossary - By Category Side 23 of 1

based just-in-time training tools (see PCPS Research Note G-613-04, Dec. 4, 1992). Casual learning can have a higher knowledge retention rate because it occurs in smaller portions (one function at a time), at the highest point of motivation (when the user wants to use a function) and in the best setting (when end users are sitting at their own PCs).

File Management: "File management" consists of any manipulation of files, including printing, copying, finding, archiving, backing up, deleting and opening. Because backing up data is rarely done, "backing up" is really "data re-creation." A 1992 study by the 3M Corp. indicated that 24 million work days per year are wasted in the United States trying to re-create data that was not backed up. Studies by both Microsoft.'s and Apple's Usability Labs indicate that a significant amount of time is spent on simple tasks like trying to locate the correct file to open.

Formal Learning: "Formal learning" occurs when an end user has to go to a classroom for lectures, or to a learning lab for video-based or computer-based training. Retention is typically low, as low as 10 percent after 30 days. While this model assumes a certain level of formal learning for all end users, typically only 40 percent of the end users who should receive formal training actually participate.

"Futz" Factor: Futz is a Yiddish word for wasting time and, in this context, refers to spending an excessive amount of time on cosmetic changes to documents or the PC environment, or using the PC for personal activities. Examples of cosmetic activities include using so many fonts in a document that it looks like a ransom note, spending time on getting the colors "just right" in a graphic that will be printed on a black and white printer, or fine-tuning a screen saver. Examples of personal uses include playing games, word-processing personal correspondence, tracking the kid's soccer statistics or chatting about personal matters using E-mail.

Peer Support: Technical support provided by end users outside of the official technical-support framework is considered "peer support." The key here is "official framework," since end-user-based resources can be part of the official technical-support organization. There are two types of "peer support," encouraged and informal. Encouraged peer support occurs when an end-user department has decided to let certain knowledgeable workers help their coworkers. Informal peer support is what we call "Hey, Joe!" support, where an end user will turn to the closest coworker and ask for help. "Hey, Joe!" support is especially expensive because if "Joe" does not know the answer immediately, other coworkers could be drawn into the discussion with the end result that three or four people will be unproductive for a half hour when a two-minute call to the help desk could have solved the problem.

Technical Support: Tasks associated with official provision of support services, as delivered by personnel paid to provide such services, for an activity such as end-user computing or LAN connectivity.

Application Consulting: As end users assume more day-to-day report generation and data analysis tasks, IS provides an "application consulting" service to end users on which tool to use for a particular task, how to access (or set up access to, see "Data Extract") required data and task-oriented assistance on the use of a tool. Application consulting typically occurs one-on-one, at the help desk, applications lab or end user's desk.

Configuration Review: IS performs a "configuration review" to ensure that new PCs meet future technical and cost requirements. The configuration review also analyzes the existing asset base to ensure that planned IT initiatives will not be inhibited by already deployed assets.

5. Appendix Total Cost of Ownership Analysis 5.1 Glossary - By Category Side 24 of 1

Data Extract: To prevent end users from creating individual versions of corporate data, IS does a "data extract" to take data from enterprise data warehouses, de-normalize it, store it on a workgroup data server (e.g., an Oracle database management system on a Windows NT server attached to a NetWare LAN) and periodically refresh it.

Documentation: Originally, "documentation" referred to writing paper-based manuals for internal applications or policies and procedures. With the advent of just-in-time training technology, documentation now includes the development of embedded, hypertext/multimedia-based, real-time help systems that cover internal applications.

Installation, Moves and Changes: assembly, delivery, hook-up and subsequent upgrades, swaps, service calls and transfers.

Newsletter and User Group: "Newsletters" and "user groups" are used for end-user continuing education on computer tools as well as for marketing IS initiatives and positions.

Planning vs. Utilization Review: "Planning" is for end-user-computing technical-support organization management as well as for the general PC asset base. Organization planning includes budgeting, staffing and work-load analysis and vacation scheduling. General PC planning includes vendor and contract management, consolidating end-user requests and project planning, and analysis of end-user budget submissions. "Utilization review" is capacity planning.

Product Introduction: "Product introduction" consists of the planning and execution of IT products' rollout, new or upgrades.

Product Review: The ongoing analysis of new or upgraded software or hardware products is the "product review."

Service/PM: "Service/Preventive Maintenance" (service/PM) includes the hardware break/fix and preventive maintenance services. Hardware installation and moves/changes are part of the administration cost model. Service/PM is the only function that is explicitly outsourced.

Standards Development: The development of the end-user-computing IT architecture, interoperability standards and approved product lists is "standards development."

Tier 1 Help Desk: The "Tier 1 help desk" is the support hot line, acting as a single point of contact for all technology-related problems (mainframes to PCs, internal applications to shrink-wrapped software, telecommunications and LANs, hardware break/fix and more) and service requests. The Tier 1 help desk is typically a part of IS, although it can be outsourced.

Tier 1 Support: In some organizations a central help desk is not as efficient as onsite Tier 1 staff trained "at the business" to do business support. These are typically larger departments that require onsite support and the effective Tier 1 staff has access to the same utilities as the Tier 1 help desk referenced above. The difference is that they will open a trouble ticket in the field (still tied to a central help database) and pass on unresolved trouble tickets to Tier 2 from their remote sites. From an end-user perspective, Tier 1 support is similar to Tier 1 help desks in that they still have only one number to call for all problems, but the difference is that they get focus support from a business, rather than technical, perspective.

Tier 2 Support: Tier 2 support provides support services beyond the Tier 1 help desk's mission or capabilities. For example, Tier 2 handles problems requiring greater

5. Appendix Total Cost of Ownership Analysis 5.2 Illustrations Side 25 of 1

depth of knowledge, visits to an end user's desk or longer duration calls. Tier 2 is a dispatched resource. Tier 2 can reside inside or outside of IS, or even be an outsourcer.

Tier 3 Support: Tier 3 support is a small cadre of highly trained technicians that are relied on for the top 5 percent of problems. They also work with the vendors' technicians and with an internal integration lab. This lab is designed to support the evaluation, testing, and implementation of all network changes, prior to integration in the field. These changes include new hardware, software, operating systems, topology changes and user-developed applications.

Training vs. Learning: "Training" is providing education to end users. This includes developing course material, reviewing and acquiring teaching tools (e.g., computer-based training modules), teaching classes and reviewing/managing/training outsourcers. "Learning" is the work that the technical-support staff must do to keep up to date or cross-trained. End users also learn, and this is captured in the end-user operations cost model.

Vendor Liaison: Part of vendor management, "vendor liaison" is the periodic contact with vendors to review contracts, technical support, product quality and upcoming product news.

5.2 Illustrations Figure: five-year TCO.................................................................................................... 3

Diagram: TCO area's 1................................................................................................... 4

5.3 Literature Brandt Allen, Make Information Services Pay Its Way, Harvard Business Review, Jan-Feb. 1987 Capers Jones, The Year 2000 Software Problem, Addison-Wesley, December 1997 Carol Hildebrand, The Price Tag, CIO Magazine October 15, 1997 CIO, Chief Information Officer Magazin, www.cio.com Dave Cappuccio and Bill Kirwin, IT Costs, CIO Magazine June 15, 1996 Gartner Group Inc., Managing Distributed Computing (MDC), Strategic Analysis Report, April 11, 1997 and February 9, 1996 Ivar Jcobson, Martin Griss, Partik Jonsson, Software Reuse, ACM Press New York 1997 James Martin, Information engineering: a trilogy, Book 1, Prentice Hall New Jersey 1989 Janet Butler, Enterprisewide Network Management, Computer Technology Research Corp., 1995 Kurt Bauknecht / Esther Wyss, So klappts sicher: Einführung von Informatik in kleinen und mittleren Unternehmungen, Zürcherkantonalbank, Zürich Sept. 1990 Panko Raymond (End User Computing), End User Computing: Management, Application and Technology, New York 1988 Paul A. Strassmann, 40 Year of History, http://www.strassmann.com Paul A. Strassmann, Information Payoff, New Canaan 1988 Paul A. Strassmann, The Business Value of Computers: An Executive's Guide, New Canaan 1988

5. Appendix Total Cost of Ownership Analysis 5.3 Literature Side 26 of 1

Paul A. Strassmann, The Squandered Computer, New Canaan 1997