Different way of thinking, about investing on IT projects!

Hello again!

As I mentioned in my last post, today we are going to talk about IT investments from the project point of view. 

But first, lets recover some concepts.

The TCO – Total Cost of Ownership – is a Gartner concept, that determines the cost that “something” has, considering not only the investment (CAPEX) necessary, but also the OPEX for a certain timeframe. The total amount of “money” necessary to keep this “something” working for a determined timeframe, is the TCO for that, in a few words explanation.

Well, during the earlier stages in an initiative, normally it is a good idea to evaluate and understand the investment necessary to run a project. However, the long term cost (in this case, I am using the TCO) is eventually forgotten.

It implies in a set of problems for the analysis around the scenarios for projects, that can create misunderstandings about which are the best fit solutions for the company, when considering the strategy behind.

To make it simple, let’s see the following scenario:

We have 2 different alternatives to implement a project. The first one, has a small CAPEX, about 500KUSD, for example, and the second alternative, has a CAPEX around 2MUSD. Initially, we can think that the first scenario is the obvious alternative for our company.

However, considering another variables, we have other costs, like OPEX for infrastructure, application management services and licensing, for example. These are not “project costs” but they still being part of the IT budget, so it is important to consider it for planning purposes.

Now, let’s consider just one of this variables in our example. If we have an OPEX about 50KUSD per month for scenario 1, and 10KUSD for scenario 2, in a 60 months TCO. Calculating this alternatives, in addition to the CAPEX, the figures change.

Scenario 1: 60 months * 50KUSD + 500KUSD = 3.5MUSD
Scenario 2: 60 months * 10KUSD + 2MUSD = 2.6MUSD

Notice that, if your company has a strategy to reduce operational cost, the best fit alternative for you is the second one, which should be not so obvious in our first analysis on that.

Of course, we have many other viewpoints from which we should analyze the alternatives, like operational impacts on the areas, change management, training and so on, that must be also taken into account, but this is just another point, that you have to keep in mind, when evaluating projects (and investments) in general.

Next week, let’s talk about technology!

Thanks!

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