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A guide to Total Cost of Ownership Analysis (TCO) - 2000

A guide to Total Cost of Ownership Analysis (TCO) - 2000

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Published by tassilo
by Erik W. Marke Grossmann, 2000

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 .

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 critical system and strategic system have become popular. There are many examples of corporations 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 methodology 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.
by Erik W. Marke Grossmann, 2000

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 .

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 critical system and strategic system have become popular. There are many examples of corporations 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 methodology 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.

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Published by: tassilo on Jul 13, 2008
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 Database Technology and InformationManagement I
Total Cost of OwnershipAnalyses
Semester Thesisat the OekrealSchool of Business ZurichProf. Dr. Klaus R. DittrichProf. Dr. Kurt Bauknecht
Presented by: Erik W. Marke, cand. MBAFrauenfelderstrasse 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 31.2 Questionnaire 31.3 Objectives 31.4 The TCO-Model 41.5 The Profit Center approach 51.6 Limitations of TCO 51.7 Delimitation to others 5
2. ANALYSING AREAS OF COSTS -- BUDGETED (DIRECT) COSTS 6
2.1 Definitions of Budgeted (Direct) Costs 62.2 Hardware and Software 62.3 Management 82.4 Support 112.5 Development 142.6 Communications fee 15
3. ANALYSING AREAS OF COSTS -- UNBUDGETED (INDIRECT) COSTS 16
3.1 Definitions of Unbudgeted (Indirect) Costs 163.2 End-user costs 163.3 Downtime 17
4. CONCLUSION 19
4.1 Is There a Productivity Paradox? 194.2 IT Remedies 20
5. APPENDIX 22
5.1 Glossary - By Category 225.2 Illustrations 255.3 Literature 25
 
1. Introduction
Total Cost of Ownership Analysis
 
1.1 Terms Side 3 of 
1
1. Introduction
1.1 Terms 
CASE Computer Aided SoftwareEngineeringCEO Chief executive officerCFO Chief financial officerCIO Chief Information OfficerCOO Chief operations officerDCO Data Center OperationDT DesktopEIS Executive inform. systemEUC End-user ComputingHR Human resourcesIC Information CenterIE Information EngineeringIS Information systemsIT Information TechnologiesJITT Just-in-time trainingLAN Local Area Network LOB Line of businessMIS Management InformationSystemNC Network computerNETPC Network PCNIC Network interface cardNOS Network operating systemNT New TechnologyP&P Policy and proceduresPC Personal ComputerPDA Personal digital assistantROC Real Ownership CostROI Return on InvestmentROM Return on ManagementTCO Total Cost of OwnershipTOC Total Ownership CostTQM Total quality managementWAN Wide Area Network WBT Windows Based TerminalWWW World Wide Web (Internet)
1.2 Questionnaire 
For such an innocuous bit of corporate scenery, PCs cangenerate surprising controversy when it comes to figuringout how much they cost. Ask the head of marketing, andhe might check his purchase order and toss the stickerprice at you. Ask the CIO, and he might add a few grand tothe purchase price to account for technical and help desk support. Ask a user, and she might point out that thebiggest cost is the time she wastes cajoling it to do whatshe wants. But here’s the scary part: The only thingbusiness executives know for sure is the price keeps goingup."The fear a lot of CEOs have is that informationtechnology [IT] costs
1
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 arebacklogs of several years. It takes too long to build systems, and the cost is too high.The difficulties of maintenance are outrageous. Management cannot obtaininformation from computers when needed. Many programs are fragile spaghetti code.Problems in data processing prevent the rapid introduction of new businessprocedures.
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
01000020000300004000050000198719962000
 
Figure 1: five-year TCO

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