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ROI + TCO = A Balanced Equation

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Let’s say that you’re talking to a friend or a colleague about replacing a legacy phone system, and he tells you why he plans to buy a particular product. “It’s all about the TCO,” he says. “ROI is just too short term.”

Is he right?

Well, yes and no. It is all about the TCO. It’s also all about the ROI.

Companies must consider both in the technology purchase decision.

The terms return on investment (ROI) and total cost of ownership (TCO) are often miscommunicated and misunderstood in the IT industry. Both metrics are helpful, but they quantify different things. Their value comes at different stages in the purchase decision process.

ROI can be especially confusing because the term can be used in two ways. In finance, ROI is a mathematical construct: the value in numbers of an annual return that you can expect from doing something.

The IT industry can use the term ROI differently. In IT, ROI can be about the productivity an organization gains by implementing a particular technology. For unified communications, this productivity could be qualitative, such as customer satisfaction, or it could be end user productivity, such as increased call volumes, call center agent effectiveness, or the time remote employees save completing a process. Although these productivity measures can be quantitative or qualitative, eventually ROI has to be quantified to justify a purchase decision.

ROI demonstrates that the technology can improve productivity regardless of which vendor is selected. In making purchasing decisions, ROI comes first. That is, ROI justifies the business case and secures the budget. Once the budget is secured and the decision has been made to implement the technology, the bidding process can begin, starting with examining different vendors and the budgetary impact of their competing products. And that’s where TCO comes in.

ROI helped you decide to buy the technology. Now TCO helps you determine which specific vendor’s product you should purchase. This stage involves talking to resellers and understanding which product best meets your needs and provides the most value for your budget.

TCO is the measure of what technology costs to own. For unified communications, these costs could include capital expenses such as hardware and software, implementation and training, system management, and network and long distance charges. The focus for organizations should be on choosing products that reduce these tangible costs over the lifetime of owning the system.

Usually when you are evaluating products for your organization, you have already decided to implement the technology; that is, the question of ROI has been settled by the time you ask vendors to submit proposals. But vendors must still prove that benefits can be delivered for the most effective price over the life of the system. Often times the path of least resistance is to keep the status quo and not do anything at all. So in addition to analyzing the TCO of implementing a new technology from different vendors, the TCO of NOT doing anything should also be looked at to confirm that a prudent decision is being made.

The TCO of a specific vendor’s solution should reconfirm the ROI, because the higher the ROI (or benefit or revenue) is, the lower the TCO of the most cost effective vendor (or total cost or expense) should be. Why might a competitor talk about ROI, but never TCO?

Because showing positive ROI is much easier than demonstrating the lowest TCO among competitors.