The CFO Guide to Information

Technology Total Cost of Ownership

 Introduction
There are only a few opportunities for most CFOs to get directly involved in information
technology (IT) projects. Any CFO whose company has undergone a significant enterprise
resource planning (ERP) implementation has probably gone as deep as a financial
executive can go into IT unless the company is a technology or technology services
company. Many such ERP projects are the result of mergers or acquisitions. Regardless, IT
projects can run into the millions of dollars and require strict governance. This kind of
experience can give a CFO unique insight into total cost of ownership (TCO) for IT.

IT oversight can be a massive job, even for medium-sized companies. One of the best
strategies for managing this, is to empower departments to participate in the budget
process, but CFOs must be careful not to abdicate centralized governance. This is
important for all of the many areas CFOs must supervise, but IT is a case, which can
yield great savings or great costs and have a profound impact on the company’s
bottom line. Using a departmental budgeting model is common, and can help break
down IT costs by department, which, even if there is no internal charge back
mechanism, is a useful and important step to understanding TCO for IT. Departments
working together under the same (or at least similar) participation in and contribution
to the budgetary process are also an opportunity for the CFO to influence a culture of
cooperation and teamwork throughout the company.

The first step to such governance is to ask of the departments, led by the CIO or senior
IT management, to develop standards for hardware, software, personnel and operations.
The delivery for these standards should show (minimally) the following things:

Detail: An outline and supporting detail of the hardware standards, software

standards, personnel (staffing and roles) and operations standards by function and
business purpose.
Sponsorship: Clear sponsorship and buy-in from departmental leadership to C-Level
approvals.
Collaboration: For all cross-departmental initiatives, the delivery should demonstrate
collaboration with other departments on these initiatives and all information should be
shared between departments except where to do so would violate security, audit or
regulatory protections.
Cost-Benefit:Each standard should be justified by a clear (or at least agreed upon) cost-
benefit analysis that shows the costs of, benefits of and alternatives to the chosen
approach.
Cost-Benefit:Each standard should be justified by a clear (or at least agreed upon) cost-
benefit analysis that shows the costs of, benefits of and alternatives to the chosen
approach.
Budgetary funding break down with multi-year analysis and life-of-service warranty
and replacement plan.

Do not underestimate the importance of collaboration. For many years, companies

allowed some departments to establish pillars that built systems independently from other
departments. This, with very few exceptions, was a roadblock to standardization and was
invariably more costly than a collaborative effort that shares resources and expenses
IT projects can run across departments.
into the millions of The detail for hardware, software, personnel and operations standards can be complex, but
dollars and require CFOs without an IT background working with the CIO or IT management should be able
strict governance. to achieve a basic understanding of the plan critical to concise budgeting and governance.
This kind of This is also an opportunity for a CFO to review each initiative in depth with the CIO and
explore a deeper C-Level understanding of the business drivers and ensure a rapport to
experience can give a help to create and maintain alignment between those business drivers and the technology
CFO unique insight being deployed.
into total cost of
ownership (TCO) for In the following sections, a detailed look at how to analyze the costs of hardware, software,
personnel and operating system costs in determining, maintaining and reducing TCO for IT
IT. is presented and discussed.

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 Section 1 – Understanding Hardware Costs

In considering TCO, it is important to understand the components that go into IT

operations. Most of these components can be classified as hardware, software, personnel or
operations. In this section, the details behind understanding hardware costs in the
infrastructure are reviewed and defined.

From a hardware perspective, start with a logical diagram of the assets and their
relationship to each other and the business. The difference between a logical diagram
and a physical diagram is that the physical diagram shows the actual detail connection
between devices and is better suited to engineering. The logical diagram is higher level and
has more information and value from a business and functional perspective. An example
drawing is presented below.

/ /

"#$%

The logical diagram is

higher level and has
more information and
value from a business
and functional
perspective.
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 Use a consistent, commonly available tool for the development of this diagram. A tool like
Microsoft Visio ™ is a common choice, but is overkill for this type of documentation, and
complex enough that it may present a barrier to collaboration. All of the core office tools
(Microsoft Office, OpenOffice, Word Perfect Office) have embedded drawing tools that will
more than suffice. The presentation tools (PowerPoint, Impress, Presentations) have the
advantage of providing an excellent vehicle for sharing in meetings and in support
of other meeting venues. The drawing above was created with OpenOffice Impress, an
open-source presentation system similar to Microsoft PowerPoint.

This diagram shows the architecture for multiple layers of service needed to be
addressed. The drawing shows a level of detail that both engineers and finance people
can discuss and cover the level of granularity necessary to understand the costs of the
hardware in the architecture. Before the cost of something can be controlled, it must be
understood. This diagram helps roll up the costs of hardware and identifies where
software assets will reside. Of course, this drawing is a pictorial representation of the
hardware in the infrastructure of ―ABC Company‖.

Each company will need to create its own spreadsheet to collect and analyze the costs. To
collect the costs of these assets several factors must be considered. Hardware can be
purchased or leased. If leased, the term of the lease must be considered, as well as the buy
out. A purchase or lease may come with finance charges that also affect the bottom line.
As you collect these costs, it is important to consider the useful life of the project against
the useful life of the hardware. There may be replacement and/or upgrade required during
the life of the project. The scientific support for this is Moore’s Law. While the most well-
known codicil of Moore’s Law is that the performance of integrated circuits would double
every 18 months, Moore’s original posit was more concerned with the complexity over
minimum component cost of integrated circuits. Wikipedia has a guide that is useful in
contemplating TCO that states: ―Computing performance per unit cost. Also, as the size of
transistors shrinks, the speed at which they operate increases. It is also common to cite
Moore’s law to refer to the rapidly continuing advance in computing performance per unit
cost, because increase in transistor count is also a rough measure of computer processing
performance. On this basis, the performance of computers per unit cost—or more
colloquially, ―bang per buck‖—doubles every 24 months.‖

Collect the data below on every asset you put into your plan and you will be able to
calculate several important factors related to the total cost of ownership:

1. Initial Cost – whether leased or purchased, what is the cost? This can also aid in
vendor negotiations. Create a separate version of a spreadsheet with this data for
each vendor.
2. Extended Cost – cost of the asset including interest, lease cost and any other cost
factors. Break interest and related costs out into their own set of columns.
3. Maintenance Cost – a maintenance contract for hot spare and replacement may be
included in the initial or extended asset cost, but regardless, must be considered. All
hardware has failure rates, and no infrastructure can afford to be without this
necessary protection.
4. Technology Instantiation Date – How old is the technology to be deployed? This
information helps determine the likely useful life of the technology. Six months is
a good age for adoption that steers clear of the bleeding edge and stays within
conventional limits for industry acceptance.
―On this basis, 5. Technology Installation Date – When will (was) the technology installed? This date
the performance of helps position the deployment against the life of the technology.
computers per unit 6. Anticipated Replacement Date – This date should be (at a minimum) 24 months from
cost—or more the instantiation date, but should include company growth factors (increases in demand
colloquially, ―bang on these systems) and should be revisited during any merger or acquisition activity that
per buck‖—doubles may constitute a change in strategic direction or a significant increase in computing
resource requirements.
every 24 months.‖ 7. Lease/Finance Termination Date – This date should be within the Anticipated

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 Replacement Date unless the replacement is built into the lease or financing.
Otherwise, it is possible a cost will be incurred for a piece of equipment that is
beyond its useful life.
8. Power Utilization – This is an important factor for overall infrastructure costs, and
whether a company hosts these systems in their own data center, or outsources that
function, power utilization will significantly impact the cost of operations for all
assets in the data center.
9. Size – The best measure of size is the standard rack unit (U). The second most
expensive commodity in the data center is real estate. It is critical to know how
much space the infrastructure will require.
10. Function – What function does this asset serve in the architecture? Is it part of the
network, web service, application layer, database layer or storage infrastructure?
Each of these components may age at a different rate depending on the company’s
use of that layer. Also, performance factors for each of these layers vary, so as
something becomes insufficient to support service in the database layer, it may be
migrated to the web or application layer and this could extend the life of the asset.
11. Environment – Is this a production asset, or does it serve one of the many
nonproduction functions. Another use for assets that no longer meet the
performance criteria for the originally intended purpose is to use them for a non-
production environment such as test, development, etc.

There are many other factors related to the cost of the infrastructure. As a company
considers whether to create (or continue to operate) a data center or host the infrastructure
with a managed service provider, there will be at least one more costbenefit analysis to be
done. Many companies find that using a managed service provider that provisions the
hardware to its customers to meet a service level, and not by mere server count, can help to
hedge the replacement time frames and almost always results in cost savings on hardware.
Unless a company is a technology or technology service provider company, managed,
hosted services are a consideration that will flatten the total cost and significantly reduce
the governance task. In the next section, the challenge of managing software costs is
discussed.

Section 2 – Managing Software Costs

The previous section of this paper discussed hardware costs. Hardware, of course, isn’t
much use without software. It can be said that business objectives drive software
acquisition and software drives hardware acquisition. If a company isn’t a technology
or technology services company and they operate under any other model, there may be
a disconnect with the core principle for IT governance and managing IT TCO:
Technologyexists to serve the business.

If a company isn’t a In this section, the detail behind understanding software costs in the infrastructure is
defined. This is tricky since each software provider can (and does) license its product in a
technology or different way. The best advice is to evaluate each software licensing for each potential
technology services vendor in advance of engaging in the sales cycle. Carefully and confidentially networking
company and they with other users of the software can help bring an understanding of what kind of
operate under any agreements are possible and provide a baseline for expectations. Unlike hardware, which is
considerably more commodity-oriented, software can be a confusing mix of features and
other model, there functions. It is important to understand the value of these features to an organization and to
may be a know when a vendor’s claim amounts to ―vaporware‖, or features that are intended or
disconnect with the advertised, but not delivered. Larger software providers have partnership programs in
core principle for which resellers may offer a deeper and more independent (if not totally unbiased
perspective on how to leverage the software to the greatest benefit. Reseller/
IT governance and Partners can also frequently champion a customer in bargaining for deeper discounts on
managing IT TCO: the actual product(s).
Technology exists to
serve the business Some well-accepted software with good support and a rich history doesn’t come from a
vendor, per se. The operating system, Linux, which is quickly gaining popularity for
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 its speed, ease of deployment, scalability and low cost is an example of such software.
This system can be deployed on just about any hardware with no cost by adhering to
the GNU Public License or GPL. There are hundreds of software alternatives in dozens
of categories that can provide solid functionality in every crevice of the IT
infrastructure. In order to take advantage of Open-Source or GPL software, a company
should examine the practices of its partners and consider regulatory restrictions that may
preclude the use of this type of product. A more loosely-organized developer community
typically develops GPL and Open-Source software, so getting updates and support
is a different process. Oracle and IBM and many other large companies have offered
professional subscription-based support programs for Open-Source and GPL software for
years. There is typically a difference between desktop licensing and server licensing,
but the focus here is the back office and Enterprise IT Infrastructure. For the desktop
products like OpenOffice, Firefox, Thunderbird and Evolution can provide the function
of Microsoft Office with no license fees. This can elicit a big savings if a company is
willing to sacrifice the compatibility factor for Microsoft Office 2007. OpenOffice will
M
read and write most, but not all, of the Microsoft Office elements in S Office 2003.
Consider open source software as an alternative to costly corporate solutions.

Server licensing is generally based on one of two models: Processor (or core) based and
User (or seat) based. It can be a challenge to know what a particular business needs. A
good way to establish this is to make sure a feasibility study is part of the Software sales
cycle. Work with the CIO or IT Management to build a test model of the system that
would likely run. In many cases the software vendor (or an eager partner or hardware
vendor) will provide an environment in which to do this testing. The output of the test
should be an analysis of how well the software aligns to the business requirements that are
driving the project and how the software should be licensed. Since feasibility studies are
somewhat lengthy proofs, they should be limited to the two final choices for any software
category. If there are studies available from independent evaluators such as the Gartner
Group, these can supply the information, provided the size of the organization, general
business model and vertical industry are similar.

What are the software categories to consider? That question can only be answered by the
financial and IT teams. The variance between companies of similar sizes, even within the
same industry, can be dramatic depending on their business model, and their style
of business. But, here are a few key categories on the top end of the budget that require
special attention:

Enterprise Resource Planning (ERP) – This software integrates the financial

functions of the corporation (General Ledger, Accounts Payable, Accounts
Receivable, etc) with the primary business functions (such as inventory,
manufacturing, etc).

Vertical Specialty Software – Software specific to the industry in which a company

works. This can include things that are a specialized implementation of something
that could be integrated with the ERP software (inventory and manufacturing), Point-
of-Sale software and retail information systems as well as Healthcare programs,
Internet Commerce and Customer Relationship Management are categories that your
company may have to consider.

Database – Most companies that hit the $50 million gross level (sometimes sooner
The variance between than that) will have to embrace a database technology for their enterprise data and
companies of similar reporting needs. Oracle, Microsoft and IBM (among others) all provide databases
sizes, even within the with integrated application development platforms.
same industry, can be Custom Software – Although it doesn’t usually incur licensing costs directly, custom
dramatic depending software developed in-house can contribute significantly to IT costs. In order to
on their business develop these in-house applications, the IT staff will likely have employed the use of
an Application Development Framework such as Java, Python, PHP or the ones
model, and their style available from Oracle, IBM and others. This is another good opportunity to leverage
of business. open-source or GPL software, but don’t ask the IT department to switch development
platforms without preparing for a religious debate!
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 Many companies are looking at offerings from cloud computing organizations to escape all
of the analysis on hardware and software solutions. Nice thought, but it is important to do
this analysis first, regardless, as it will help establish a baseline and limits for cloud
application configuration and spending. To do otherwise is to abdicate the budget with the
very governance that this paper has been addressing. Many companies will find that the
use of a given software category will not be compatible with a cloud computing model for
any one of a number of reasons. The main issue is the need for flexibility beyond the
vanilla cloud computing offering. This leads to customization costs that push the costs
up to or beyond what it would cost to create and maintain the infrastructure in a simple
hosted and managed service environment, and sometimes even in-house.
This is an analysis that must be performed to ensure success.

The CIO is an invaluable asset in this process, and is a partner with the knowledge of
licensing and deployment of the products under consideration. Leveraging these resources
will get the detail needed to save the company on significant one-time and ongoing costs
for software licensing.

In the next section, organizational personnel costs are examined, including who to
leverage and where to save money on one of the most expensive resources in a
company–people.

Section 3 – Managing Personnel Costs

In the last section, software costs and the licensing process were discussed.
While software and the hardware on which it runs is a vital part of a company’s
operations, the most valuable resource by far is still people. Human resources are the most
complex resources to manage in Information Technology and everywhere else in the
enterprise. The roles that need to be filled in the IT department have a lot to do with how
IT services are structured. For each company that is very different. Below is an outline of
a few key roles that a company is likely to have or need in IT.

Chief Information Officer (CIO) and/or Chief Technology Officer (CTO)Most–

medium to large companies have a CIO. The CIO is responsible for the strategic
alignment of IT Services with the business objectives of the company. The role has
generally replaced IT director, and tends to encompass more, in that it typically
focuses on the structure of the information and how it relates to the business. The
CTO title is commonly used interchangeably, but in some organizations is used for
the role that focuses on hardware and infrastructure. The CIO/CTO role is generally
responsible for all software and hardware.
Operations Director – The operations director typically has responsibility for the
infrastructureís day-to-day operations. This position may also have influence on
software purchases, but these are typically enterprise management software like those
that monitor system health, manage system configurations and schedule batch jobs.
Security Director – The security of enterprise computing is key to the success
of all companies. One breach can cause a company to shut down entirely, and
sometimes even permanently. The best security directors are constantly looking for
ways to mitigate threats to the environment by intrusion or by policy. The security
Many companies director is a key resource in any audit, including SOX, or those related to industry
will find that the specific compliance. Security can be the responsibility of a variety of people in an IT
use of a given organization. The role tends to get delegated to someone in the infrastructure part of
software category the IT community especially in smaller companies. Generally, the larger the company,
the larger the infrastructure, the more need for this role.
will not be
compatible with a IT Manager – There are many roles for the IT manager. In larger organizations there
may also be a director level role with a similar function. They are assigned to different
cloud computing parts of the IT operation, from those who manage portions of the infrastructure, to
model for any one those who manage specific applications (e.g. enterprise resource planning) to those
of a number of who interface with business leadership directly to ensure the alignment of services
reasons
 under the direction of the CIO. In managing the cost of the enterprise these resources
are key. They are typically the keepers of the operational intelligence of the enterprise.
In smaller companies they report directly to the CEO or COO.
Project Manager – Project managers in the IT space can range the gamut. Not every
company has a project management position, many require IT managers to be versed
in project management. Either way, the project manager position is one that plays a
key role in understanding the costs of the enterprise. The budgets for projects all have
IT components, which should be rolled up into the larger IT budget, so it is vital to
partner with project management.
Functional Analyst – Functional analysts in IT are subject matter experts who
understand the business and how the software can be leveraged to enable it. They are
essential to making the most out of software budget and the hardware that supports it.
They usually support project managers in developing cost models for projects they are
assigned to and can assume the project management role in many organizations.
Administrator – Network, Storage, Server (systems) and databases usually come
with administrators that manage their systems at a detail level. Each of these types
of systems have a software component, and, with the exception of most database
platforms, a hardware component.
Individual Contributors (Developers, Analysts, Data Administrators, etc.) -
There are a host of other roles that make your IT department hum. The individual
contributor is a role that may have a specific skill set related to a reporting or
programming language or may have specific software expertise.

Now, based on this overview of IT roles, what is the best use of all these people? Are they
all needed to have a healthy IT operation? Each of these roles is important, but there are
alternatives when growing an organization to acquiring these resources internally.
Understanding this is probably the biggest key to controlling IT costs. Staffing levels are a
complex topic, but as related to costs, the formula is simple: Lower staffing levels equals
lower costs. The key is to do this without compromising the health and availability of
systems, or the critical mass needed to meet deadlines for key project objectives. Staffing
levels are also subject to change. Most companies hire contract IT staff for short-term
projects and/or for specific expertise.

Organizations cannot (or at least shouldn’t) compromise on the CIO, operations director or
security director. These are strategic resources that a company can’t do without. Keeping
leadership consistent and on-message is vital to achieving business objectives, creating
and maintaining confidence in the IT organization throughout the company. IT
management is also important for meeting strategic objectives, but can also swell to meet
specific tactical project needs. Most larger companies have some stratification in their
management ranks. Leverage these strata to keep projects on track and understand where
the CIO and other members of the senior management team absolutely need internal
resources and where contract resources will work. They can also help to identify where the
best sources for expertise lie and what the alternatives are for acquiring help or
outsourcing these functions.

Functional Analysts, Administrators and individual contributors are typically tactical

players. A certain number of these resources must be internal employees to maintain the
working knowledge of systems and how they relate to operational and business objectives.
One of the tasks to drive down through the IT organization is to set baseline levels and
update them as the company grows and systems proliferate.

As the process of reviewing personnel costs moves forward, the management team must
Staffing levels are a be on board. This is a critical part of maintaining costs in IT, and regular review can
complex topic, but as help shed light on the resources needed and the IT organization’s approach for meeting
related to costs, both strategic and tactical objectives. This is another opportunity to build unity and
the formula is simple: communication lines from IT to finance, and that is always a good thing. In the next and
final section, the pieces of the IT operation reviewed to this point are summarized, and
Lower staffing levels some of the logistics of daily operations are covered to illustrate where big cost savings can
equals lower costs. be achieved with some strategic and tactical investment.
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 Section 4 – Review and Summary

In this section, key operational information for CFOs is covered and the first three
sections of this paper are summarized. In addition, there is a review of important ideas on
how to manage costs from the CFO chair.

The most important idea in this report is that the technology exists to serve the business. In
the context of daily operational requirements, this idea can be a challenge. Daily operations
exist to serve the technology, which serves the business. A little convoluted maybe, but
further review reveals the logic. Unless a company completely outsources their technology
infrastructure, there are daily operational requirements to manage. Even fully outsourced
IT departments should have review points on key operational activities. Let’s summarize
them: Security – Review statistics for intrusion and key metrics related to audit points and
regulatory compliance.

Hardware – Review maintenance contracts regularly and compare with the (high-
level) performance and reliability of the hardware. For companies with data
centers, this includes all of the support systems such as power management and air
conditioning.
Backups – Ensure that backups are being taken and tested (restore and operational
tests) at intervals that are consistent with the service level required by the business.
Create a standard for a Return to Operation (RTO) time frame after a failure and ask
IT to verify.
Disaster Recovery – Review the disaster recovery plan and participate in regular tests
where key systems are failed over to the disaster recovery site (or systems). These
tests should be executed semi-annually (at least), and should be amended to include
new systems that are developed in between tests.
Systems Inventory and Documentation - Review the end-user components of these
documents along with run-books and any other systems interface documents that are
core to your business operations.
Staffing – Operations is an area where many companies choose to use remote
management companies or outsource. These activities can be relegated to a
commodity-model and save on staffing. Encourage IT management to consider
outsourcing these functions rather than investing in personnel to manage them
internally.

There is a lot to remember, but the CIO should be in good shape to help keep track and
showing this level of interest in IT operations keeps everyone informed on what is
required (and to some degree, what is not) for the daily operations of the systems on
which the business depends.

Let’s take some time to review the key reminders from the other section of this paper with
the key elements of each:

Hardware
- Require communications in a commonly available tool
- Require replacement and fault management in any purchase contract
- Require data for each asset to be collected and updated regularly and accessible
- Create a culture of service and efficiency in the Infrastructure Operations team,
driven from management on down. Consider creating cost savings award programs.

Software
- Engage a trusted partner to help you navigate licensing for enterprise software
Daily operations purchases
exist to serve the - Consider open source software for enterprise and desktop applications where
technology, which appropriate and supported by the business and industry standards
serves the business. - Require a proof of concept model for every significant software purchase (especially
ERP) and leverage hardware and software vendors to make it happen. A partner
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 can help facilitate this.
- Require IT to consider the trade offs of custom, internal, package, outsourced or
cloud models and make sure each are run through a rigorous evaluation and proof of
concept where possible/practical

Personnel
- Maintain a strong relationship with senior IT management. CIO, Security Director,
Operations Director and top IT Managers are the keys to carrying the message to all
of IT and keeping it fresh, relevant and serving the business.
- Keep staffing levels tight enough to maintain operation and business knowledge
bases, and avoid over-hiring by leveraging a good partner that can offer good
enterprise IT services.
- Get involved in these relationships, if only peripherally to keep partners on message
as well.
- Participate in regular staffing reviews with IT management to stay in the loop on IT
staffing requirements and to help manage costs

Operations
- Review key operational activity status at least semi-annually with IT/Operations
management to ensure compliance.
- Insist on and participate in regular recoverability tests of backups and disaster
recovery plans.
- Documentation – Make sure there is ample systems documentation written for the
end-user that keeps the understanding between business users and IT tight, and
operation of systems on which the business depends smooth
- Staffing – Consider remote management or outsourcing to manage operations as the
company grows without growing staff.

As CFO work with the CIO and other IT management to create this focus in the culture,
and it will serve well in providing better quality solutions to the business and eliminating
unnecessary costs. Bear in mind that, as an organization grows, IT costs will grow.
Regular review of the cost structure of the IT operation is an important tool to engage the
IT management team in creating a culture of efficiency and service, and it keeps everyone in
the loop on what IT is doing at a level that makes sense.

As the company grows, an IT-savvy liaison that reports directly to finance will be needed
that can help manage these details and keep the finance department informed. BestIT’s
Virtual CIO service is a great companion to a CFO that can help leverage many years of
IT expertise in creating the most cost efficient model possible for IT operations. Contact
BestIT for more information.

About BestIT
BestIT is the leading provider of IT outsourcing services. Our core business and
technology solutions help our clients worldwide improve their business performance and
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Virtual CIO service is Our solutions offer customers:

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creating the most cost
efficient model
possible for IT
operations.
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