ROI vs TCO: The CIO Debate
Difference between ROI and TCO with regard to purchasing technology
According to a recent CIO survey, ROI metrics have been performing better in determining more IT project decisions compared to total cost of ownership decisions. This shows that the technology is highly valued in the digital sector.
Basically, ROI analysis can quantify both the risks and potential benefits of embarking on a project over a given period of time. In comparison, TCO will only cover the costs aspect. As a CIO when uses TCO you rarely see IT as a driving factor or a tool that can increase your profits, your income or your customer value.
In a recent survey targeting 225 IT managers, 59% of them mentioned that ROI influenced their decision to pursue a project over the last year, compared to only 41% who claimed TCO influenced them. That margin is wide but still leaves the question in the air as to which technique is superior.
With that being said, TCO works well for key digital infrastructure projects, such as updating the email network. A CIO may use it to make presentations to other senior directors that compare the value of implementing one email feature over another. However, email does not uncover new revenue sources that ROI can effortlessly assess.
What do these terms mean to a CIO, and when is it appropriate to use one over the other?
Generally, TCO can show Chief Information Officers a fiscal comparison between their solutions and that of the competitors. When used at the correct time, it can help you win more deals and close them much faster.
Furthermore, the system provides a solid response to possible price objections and works as a comparison framework for building your business case. For instance, buyers would be able to see the costs and potential benefits of using your solution over the competitors.
On the other hand, ROI will help you show customers the price of a delay in making a purchase and validate the cost that you are asking for. It can support your business case by providing the cost justification, as well as a competent illustration to the financial team and purchase
committee. As a CIO, presenting higher ROI can help improve your average selling price, reduce the sales cycle and also increase the sales-close value.
The value of open-source software to a CIO or business
ROI metrics are helpful to your business since they determine the numerical value of annual returns that you can get from it. However, in the IT sector, it works differently by determining the productivity of an organization after implementing a certain technology. This metric can be qualitative such as assessing call-centre agent effectiveness, customer satisfaction, call volumes and even end-user productivity.
On the other hand, TCO measures what a particular technology costs to have. These expenses may include system management, network charges, implementation and training. As a CIO, your focus should be on choosing products that minimize these material costs over the system’s lifetime.
In conclusion, the choice of using either RIO or TCO for your business depends on the goals you want to achieve. Generally, RIO is better for measuring numerical metrics whereas TCO is ideal for showing financial comparisons.
As a company with a large digital presence, we understand the need for CIOs to make the correct decisions pertaining to the costs of the company. We try our best to provide CIOs, CMOs and CEOs with valuable information through blogs and case studies to provide insight into different areas of interest. If you are interested in related content, check out our blog posts.