Any CEOs responsibility is to create shareholder value and to look after shareholders’ interest – both short and long term. Purchasing decisions are therefore often made based on perceived short term benefits, and can be influenced by items such as bonus and share option incentives. This is according to KSS Technologies' CEO, André Maree.
He warns that the long term impact is often ignored. “The problem is that purchasing decisions are often based on initial cost, upfront Capex only. CEOs seriously need to consider the total cost of ownership (TCO) — the Capex plus Opex over a lifetime of three to five years of the solution.”
“The situation can be likened to the Titanic and the iceberg. The true risk to Titanic (the business) does not lie in the visible iceberg (Capex) but primarily in the hidden part of the iceberg (Opex) over the lifetime of the solution. Just like a model had to be developed to estimate the hidden size of an iceberg, businesses have to develop a model to determine with some degree of accuracy the hidden Opex costs,” he explains.
“They often have to decide which is more important to them – the cost of acquisition or the total cost of ownership. Especially in today’s economic climate, the temptation is to go with the cheapest option, but in the end, one will realise that the cheap option costs much more.”
Maree says the majority of the TCO is hidden on support, maintenance, cost to business of (un)planned downtime and system upgrades.
“Costs are tucked away in various budgets and to make it worse, higher maintenance and support costs (such as technical staff salaries) are sticky and stay for years. Other items like the business cost of downtime are ignored because everyone believes it will only happen to someone else.”
Gartner says until recently, the average IT organisation dedicated 66% and more of its budget to day-to-day operations leaving little room for transformation of business strategy using ICT. CIOs see the introduction of Internet service-based technologies as changing that equation and releasing between 35% to 50% of infrastructure and operational resources for innovation and growth.
This is creating a new CIO success cycle, one based on creating and realising new sources of value, in addition to cost-effective IT operations.
The report states that over the next five years, CIOs expect dramatic changes in IT as they adopt new technologies and raise their contribution to competitive advantage. Leaders will implement new infrastructure technologies to achieve increased efficiency and to redirect IT resources to create greater business impact.
Pursuit of that leadership agenda will raise complex issues ranging from re-imaging IT's role in their organisation to the creative destruction necessary to break old practices and redeploy resources to new initiatives.
“Furthermore, complexity from multi-vendor environments increases operational costs. To counter this, a high degree of standardisation leads to simplification in turn resulting in lower Opex and higher uptime. Fewer vendors involved in a single solution also lead to a higher level of integration and thus higher functionality and user productivity,” he says.
“A higher Capex decision is often better, provided hidden Opex costs can be demonstrated to be lower than the competing lower Capex solution. A good example is network convergence where the first phase requires higher Capex to put the foundation, a single intelligent secure IP network, in place.
"Subsequent phases such as voice, video and storage convergence can then benefit from the initial investment through reduced Capex.”
In conclusion, Maree points to a comprehensive lifecycle costing (LCC) methodology that KSS has developed to assist with the process of evaluating various solutions fairly. KSS has the tools and methodologies available to demonstrate the benefits of “high Capex – low Opex” solutions versus “low Capex – high Opex”.