Some Costs are Easy to Find

Learn about the difference between cost and value, and start to build an accurate total cost of ownership.

What’s the first thing that comes to mind when someone says "cost"? For most people, it probably conjures up images of opening up a wallet or purse and handing over some hard-earned money in exchange for some goods or services. Pretty simple, right? Cost is how much we have to shell out to get that slice of pizza for lunch or the latest new mobile device. Most times, if we’re the buyer, we want to keep that cost as low as possible. Of course, the seller would likely have that cost be as high as the market would allow. Moreover, sellers sometimes try to remove that "cost" word entirely and instead opt for something nobler like investment—for example, when you buy a new car, the salesperson might say you’re "investing in yourself."

Cost is not price

Here’s the thing. Cost is one-dimensional. Usually, it's measured as an amount, which is a number. Numbers of dollars, numbers of gold doubloons, numbers of hours spent working on a new certification. If we just look at cost, how do we know if we’re getting a good value? If a new cordless drill costs $100, how would we know if that cost is reasonable? Well, in the age of the internet, we would probably shop around by checking out various online stores. We would also search for some customer reviews to see how other people found the functionality, quality, and durability of that product. The technical specifications might be important, or maybe we have an existing set of cordless tools from a certain vendor. Finally, we would likely want to be sure we need that drill. Of course, our need is not for a cordless drill specifically, but rather the need is to make holes in wood or metal and to do so without having to break out an extension cord. And the amount of researching and scrutinizing we do is probably in direct relation to the asking price.

We are always weighing cost and the value we can receive for that cost
We are always weighing cost and the value we can receive for that cost

Cost by itself isn’t much use because we need to consider the benefits that we can expect to get in return for that cost. Economists call this utility. By weighing the cost of something against the utility that cost will give us, we can arrive at this notion of value. Is it worth the cost of hours of hard work and study to earn a cloud certification? (TLDR; yes, it certainly is!) If that certification requires that you spend 20 hours learning new stuff, and you know that cloud certification will allow you to earn 2x more than you’re earning now, that seems like a good cost/utility ratio—in other words, good value.

This concept of value will be essential as we dig into cost optimization. Determining value is going to get much more difficult as our scenarios get more complex. For most advertising and marketing efforts, the goal is to elevate the implied utility of the thing to increase its value and justify the cost. Sometimes, utility is not tangible at all, but rather a feeling or emotion. Millions are spent on marketing budgets to increase the perceived utility and value by describing products as “the most effective” or “the most luxurious” one on the market.

🔍Sidenote: See if you can keep up with how often advertisers try to boost value by claiming more utility. Once you see it, you can’t unsee it.

Now, from an IT organization's standpoint, costs come in many shapes and sizes. We’re going to go over some of the types of cost here in case you’re not familiar with them. Occasionally, people get a little freaked out about cost because they think it might not be any of their business. Here is a valuable recommendation to all technology people: learn more about the concepts of management, strategy, and finance. Being able to speak the language of business will carry lots of utility in your career, and most concepts are pretty simple to get your mind around once you get past the sometimes overwhelming vocabulary.

💡Pro Tip: You don’t need to earn a college degree in finance or accounting to increase your knowledge of business management, strategy, and finance. Just introduce some new reading material to your routine, such as Bloomberg Businessweek, the Wall Street Journal, the Financial Times, or whatever business periodicals are popular in your area. You may not understand everything being written initially, but it will get you familiar with the concepts and terminology.

Total cost of ownership

Chances are that you’ve heard of the total cost of ownership (TCO) before. If your company has migrated to the cloud, or maybe is considering such a move, you’ll likely need to come up with a business case. That business case usually includes, among other things, a total cost of ownership comparison between the current state and a potential future cloud state. Generally, decision-makers like to see a comparison to help inform such a decision, but as discussed previously, it is not just about cost. Perhaps the total value of ownership is better, as we need to consider all the benefits those costs (or lack of cost) will contribute to our organization.

TCO is comprised of several cost components, which are not always easy to value
TCO is comprised of several cost components, which are not always easy to value

Creating a TCO analysis may seem simple on the surface, but most organizations find creating an accurate TCO pretty challenging. This is mainly because most organizations do not do a good job of tracking all their costs. Let's look into some obvious costs first.

The obvious stuff

When rounding up our overall costs, it's best to start with the costs that are easiest to find. For stuff like servers, networking equipment, laptops, printers, and software licenses, the cost is usually pretty easy to find because they will show up on an invoice from the vendor.

Other costs might require a bit more digging to understand fully. If we have a data center, then it probably has a cooling system that keeps all those servers at a reasonable temperature. We may have a fire suppression system and an uninterruptible power supply, both of which require maintenance every so often. If we’re in a regulated industry, we might have installed security cameras or card readers for door access. We might also have to pay an external auditor to come in occasionally and sign off on all the processes and procedures.

Typical “easy” costs for a TCO include staff, equipment, buildings and applications
Typical “easy” costs for a TCO include staff, equipment, buildings and applications

Of course, we have the actual staff we have to hire to keep everything running. We have the direct staff—the engineers, developers, support desk staff, QA testers, and so on—the people directly required to deliver our IT services. We also probably have some indirect staff, such as leadership roles, administrative assistants, project managers, purchasing people to help us buy stuff, and maybe legal staff to help with contracts.

Don’t forget about the stuff that is offsite. If we have a disaster recovery location, we might be leasing space and filling it with enough duplicate equipment that it can act as a fail-over site. Perhaps we pay an escrow company to store offsite backups, digital archives, or copies of source code. We might also have to pay annual support contracts to some of our hardware and software vendors. We probably also pay for our wide-area network connectivity to our other locations and the internet. Our data center likely uses lots of power, so we’d want to at least try to figure out our portion of the overall power bill.

We’re starting to get a better picture of our total costs, but we’re not done yet.