Why do operating budgets become heavily backloaded towards the past, rather than towards future opportunity? Because too many organizations prefer to base business cases for a proposed system on corporate accounting policies, instead of forecasting the true cost of ownership, thereby creating an increasing legacy of sunk costs for years to come.
I have lost count of the business cases presented to me for approval that purport an 80:20 split between initial outlay and ongoing investment.
Generally such investment cases are simply designed to illustrate a favourable payback within the designated corporate accounting timescale, i.e. an exercise in goal-seeking accountancy.
And yet, many of us believe, with good cause, that the true lifetime cost of a business system is more like a 20:80 split, between initial investment and ongoing costs for operation, maintenance and further development.
That’s why I routinely challenge every case that doesn’t show the ongoing cost as more than the initial investment, because experience has taught me that the acronym TCO really stands for the True Cost of Ownership.
Here are some of the factors which influence my rationale for evaluating the true cost of ownership:
- A typical business case will often set out the purported total cost of ownership, expressed over a five year period, which is surprising because most business systems actually have a much longer life-expectancy.
- After initial implementation, the system will need to be changed a number of times during its lifetime, such costs are often non-trivial.
- Shortfalls in the investment proposal budgets often end up adding, by stealth, to the cost of “Business As Usual.”
- The ongoing costs do not actually disappear until the system is successfully decommissioned and consumes no further resource; very few business cases include the cost of retiring the proposed system.
These factors explain why the typical IT/ IS operating budget is so heavily biased towards history. The spurious 80:20 investment proposals convert into a legacy of 10:90 splits between future opportunity and sustaining the installed base.
Routine failure to pose, letalone address, questions about the true cost of ownership is a source of major budgeting problems for many CIOs and their organizations.
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