Using total cost of ownership and return on investment to steer IT decisions

Why financial acumen matters for IT purchases

Big company failures, from Google+ to Windows phones, are reminders that large sums of money spent without careful assessment can go badly wrong. Sometimes taking a risk pays off, but most of the time careful and considered decisions are far more likely to succeed. Whether a business is large or small, financial acumen sits at the root of operational success, and there is little room in any budget for genuine surprises.

Every purchase and project should be assessed, with its costs set out clearly, to determine whether it is realistic and achievable, and later whether it actually delivered results. With so much data now available from the technology already inside a workplace, using it to pin down costs, investment and planning is easier than it has ever been.

What total cost of ownership actually captures

If a business plans a major purchase, such as a new IT system, it makes sense to work out exactly what makes up that cost. Total cost of ownership, or TCO, is a mechanism for doing this. It will not be accurate to the last pound, but it gives a realistic figure to work with, to see whether a project is viable, needs to be scaled back, or could be expanded.

The key point is that TCO is not the single price of the item being considered; it is all the related expenses combined over the longer term. In the same way that buying a car means adding predicted direct costs, such as repairs, servicing and fuel, and indirect costs such as insurance, registration and parking, an IT system's TCO estimate should encompass all direct and indirect costs associated with it across its lifetime.

• Initial purchase costs: software licences, maintenance, subscriptions and any subsequent expansion
• Operational costs: power, broadband and administration expenses
• Implementation costs: installation, configuration, integration and migrating data from an old system
• Training costs: essential regardless of the time and money involved, or the solution will sit unused
• Maintenance costs: technical support and updates, alongside cybersecurity, compliance and data protection

How return on investment differs from TCO

Alongside TCO, a return on investment calculation shows how successful, or otherwise, a project has been. Unlike TCO, ROI does not take a set time period into account by design; it provides a window into an established project's costs so a business can assess whether the activity was worth the money, and be better informed for future decisions.

Numerous ROI calculators exist online, where business figures can be entered to produce a result as a percentage, making it easy to see whether the impact of an investment was negative or positive. With ROI, the focus is on the benefit delivered, and two years after implementation is generally considered an acceptable point at which to assess whether a project has delivered on its promise.

Where these calculations matter most

TCO and ROI calculations come into their own on big projects, most often when an organisation buys new technology to use across all its sites, an outlay that adds up quickly for a business with offices in multiple countries. For substantial software projects that will be used across the whole company, there is a great deal riding on getting the assessment right.

It is not simply a matter of ticking boxes on a checklist; every business is unique and will have its own particular costs to consider. The key to being effective with TCO is to monitor its variables constantly. This avoids cost increases arriving unexpectedly, and allows leaders to pivot and make changes at the right point, while also ensuring the software purchased continues to align with strategic goals and stays on track to achieve the returns originally hoped for.

Measuring the return once a project is embedded

Once software is embedded in the business, this is the point at which the ROI calculation comes into its own. Keeping indicators simple yet meaningful highlights the most important gains a project has achieved. Have internal costs reduced as a result of implementation? Is the business providing a better service, reflected in customer numbers? Is that translating into more revenue?

These are the kinds of practical questions ROI is meant to answer, and they should be asked deliberately rather than left to impression. A project that feels successful is not the same as one that can be shown, with figures, to have delivered value.

The role of AI in TCO and ROI analysis

With the abundance of data now held within businesses, artificial intelligence can help create more advanced analyses for financial forecasting. The banking industry, for example, already uses machine learning to analyse markets, predict trends, identify fraud and enable better risk management, showing what is possible when large volumes of financial data are put to work.

AI could offer a business a tangible way to predict risks and rewards based on its own figures, mapping how projects might unfold year on year. The caveat is always ethical: business leaders must consider carefully what data they feed into these systems and whether it should be used to train them, given that this is, in essence, what is happening even as the tools do impressively clever things at speed. Using TCO and ROI calculations in strategic planning is the sensible approach, but applying human common sense alongside the figures is what makes the predictions genuinely useful.