IT expenditure: the errors of focusing on TCO

Charles Wang is one of the great survivors of the IT industry. He founded Computer Associates in 1976, and has helped build it up to a company which turned over more than $5bn last year.

So when he says that the business community has been looking at IT in entirely the wrong way, we should pay attention.

Speaking at CA World last month, Wang said it was time to stop looking at the IT department as the place to save money. Instead, companies should demand that it bring in new revenue streams for the business. He claimed looking at it in terms of total cost of ownership (TCO) or return on investment (ROI) were no longer viable options.

As an example, Wang said that a company spending 5 per cent of revenue on technology could set out to cut these costs. If successful, it might reduce spending by 10 per cent - bringing costs down to 4.5 per cent. But what if the department was given more investment but increased company revenue by 10 per cent?

Jim Proctor, alliance manager at Cap Gemini, said: "I heartily endorse these comments. Traditionally, IT management has been about providing a service at the lowest possible cost, but not to think entrepreneurially about the business."

Proctor added that IT managers have to think like business people. But he also said: "We need a cultural shift within business too - IT departments have often been kept at arm's length from the real business."

He believes that IT has traditionally sat underneath finance directors, who tend to be better at managing costs than being imaginative business developers.

Dr Richard Sykes, the outgoing chief information officer at ICI, said: "There are two ways to change this. First, the IT industry has to stop proselytising technology and focus on what it can do in business language. Secondly, we need a big shift within IT departments - a move to a business focus rather than technology. We will increasingly see this anyway as IT starts buying in services instead of technology."

Jonathan Furlonger, research director in European management research at Gartner Group, said: "I broadly agree - it's not about cost, it's about value."

But he continued: "I've had groups of senior executives in from companies and I get them to mark on a line how important IT is to their business. I often get a wide range of views as to where technology is from people in the same company. So it is no wonder they cannot give a clear message to their chief information officer."

Furlonger said companies need to position themselves on a sliding scale - from 'IT is a necessary evil' to 'IT is central to my business' before deciding on spending. If IT is a central concern then companies will spend money on technology without needing instant results. He said TCO was still a tool to be used.

However, it's long-term future as a useful measure of the effectiveness of IT is in doubt. In this week's opinion piece (http://www.silicon.com/a31897 ), Will Capelli, vice president of Giga Information Group, suggests a new metric - called real option pricing - could represent a more accurate way of measuring the impact of IT.

By moving the debate away from total cost of ownership, IT departments may find they'll get more funding from their paymasters. But they will still have to deliver real business benefits.