“To be, or not to be” is the famous opening phrase of the soliloquy given by Prince Hamlet in the “nunnery scene” of William Shakespeare’s play Hamlet (Act 3, Scene 1). In the speech, Hamlet contemplates death and suicide, bemoaning the pain and unfairness of life, but acknowledging that the alternative might be worse.
“To compute ROI or TCO ” is the classic conundrum faced by business analysts who must determine how to assess or present the value of a potential investment or purchase. Unlike Hamlet, business analysts rarely contemplate death or suicide while belaboring which calculation to use, but it does happen in rare cases. Here’s why.
ROI vs. TCO – The Ideal Thought Process That Businesses Must Have
When I think of Return on Investment (ROI), I think of value propositions; I think, “What do I get back if I invest in something?” When I think of Total Cost of Ownership (TCO), I think of what’s the real cost or total cost to me over a period of time.
Although the concepts and calculations are different, they are related, and they share certain input and output variables.
Which calculation is more appropriate is determined by the type of investment being considered?
For example, If I were interested in cloud transformation, TCO might be more important. I would compare the current cost of my on-premises solution to a cloud replacement.
If I were interested in purchasing a new ERP system, on the other hand, ROI would be more important. Why? Simple, what more am I getting by replacing my old system of doing my books? Upgrading to a modern system or platform, or moving from manual to automation, results in a measurable increase in value.
Suggested read: Ultimate guide to customer value management
ROI vs. TCO – Two Ways To Look At When You Make a Purchase
A TCO analysis when purchasing a copier. When comparing copier options, it’s more important to know the cost from acquisition to lifecycle over the life of the product. ROI is important, but not essential. You’re likely going to realize similar value, regardless of the copier you ultimately decide upon.
Take IoT, for instance. The Internet of Things is a phrase that describes devices connected to the Internet to improve people’s lives. Smart homes, for example, took the world by storm. Devices that can monitor people from their home, or the use of voice control for the elderly. Should your investment in IoT be considered from the lens of ROI or TCO? After all, IoT is supposed to add value to people’s lives.
Once again, I believe it depends upon what the IoT device is being used to accomplish. Is it a thermostat in a large industrial building that can help reduce energy costs? That might be an ROI calculation because we want to measure the savings over a longer period of time. Or is it a medical device that improves a patient’s hearing. That, on the other hand, might be more of a TCO calculation primarily because it’s an investment that will be measured more for its cost over it’s lifetime not the return on the cost to improve their hearing.
Questions To Ask Before You Choose ROI or TCO as a KPI
The very first question I ask myself when purchasing an asset is this:
What is the asset I’m buying?
Are you buying a laptop with more memory, or a new server with more power? These are assets where TCO calculations are more important, since there are ongoing costs that can be forecasted in both cases, and the forecasts will differ based on the type of solution you purchase. You must weigh the current cost versus the upgrade cost. On the other hand, are you purchasing an MRI or a Laser System to perform surgery? These assets generate income that offset the largeupfront and ongoing costs over time. I would suggest an ROI be completed.
The Bottom Line On ROI vs. TCO
The bottom line on ROI versus TCO is this: What are you buying and why are you buying it? If the answer is to improve our life, save or make money, and increase productivity, ROI is probably the calculation you need to make. If you are simply replacing one asset with another, or upgrading for the sake of technology, TCO is likely your choice.
We hope this article saves you some of the angst Hamlet endured. Happy modeling!