Buying technology? Consider all costs

If a refillable pen costs $49.99 new and annual refill expenses are $100, would you purchase a box of those pens for your business? Of course you wouldn’t. At the same time, if I told you a new Microsoft server would cost your business $4,000 up front and require $6,000 a year in maintenance, would you be shocked? Well, you shouldn’t be.

As a technology consultant, I’m frequently asked by small business owners about what technology best fits their business. Such is the nature of my profession. Throughout the process of discussing solutions, I can hear the “what’s this going to cost me” gears turning in my client’s head. With a virtually unlimited supply of technical solutions available to the market at a huge range in price, cost containment at the “middle” line is absolutely necessary for business. However, simply focusing on the capital expense without consideration of operational expenses is a major mistake when purchasing technology. All businesses can quickly and affordably replace all their pens. But how quickly and affordably could you replace your servers, computers and software?

The focus on capital expense really comes from two influences. First are the technology manufacturers and software publishers. As the technology market has matured, software and hardware margins (or markup) have contracted to a point where selling hard product is basically a break-even proposition without a large supporting volume. As margins have narrowed, manufacturers like Dell and Hewlett-Packard have had to work their “middle line” (cost) to remain profitable and competitive. What this means to you is the computer you buy today, while superior in speed to computers you might have purchased 10 years ago, are less dependable and less expensive. Lower published prices are always attractive to the market, but the $100 refills aren’t being discussed. In this case, the $100 refill includes all the costs associated with having an employee work without a computer for at least one, if not two or more days, when infected with spyware or when her computer crashes and requires a rebuild or replacement.

The second influence is an “I don’t buy service agreements” mentality. For disposable type-items, like small printers, which are low-cost, low-configuration and easily replaced, I’m in complete agreement. For servers and networking equipment which are critical to all your employees each workday, I disagree.  The fact of the matter is that when you consider warranties when purchasing hardware and software, everything we purchase comes with some type of service agreement already built into the price. The idea of extending that agreement either with the manufacturer or your trusted technology vendor shouldn’t be perceived as breaking some cardinal rule. Rather, it should be viewed as guaranteeing an expected life of service.

Another commonly misplaced strategy is the “spares” approach. Meaning, if the capital expense is low, I’ll simply stock spares in the event of failure. This approach works fine for keyboards, mice and perhaps computer printers where the replacements are truly plug-and-play, but not for servers, computers or network security devices that require hours or days of configuration. Are spares handy? Absolutely, they remove availability and shipping from the equation, but not the more expensive configuration and downtime expenses.

Considering maintenance and wear and tear over a five-year life span, today’s business servers and computers cost as much as five times MORE than computers purchased 10 years ago.

You might be familiar with Total Cost of Ownership (TCO). If you’re not, I promise you your accountant is familiar with the term. Even the most rudimentary TCO analysis can provide a sound strategy for procuring technology and services from a cost management perspective. TCO includes hardware and software purchases, labor for setup and ongoing break-fix maintenance services and warranties as well as lost productivity during downtime. With this wide-angle view, you can see how TCO can easily grow to several times the original hardware and software purchase price.

For those business owners who build in maintenance and support services during the life span of their technologies, the costs are better managed and the outcomes more predictable. For business owners who choose to “self-insure” and avoid ongoing maintenance and upkeep, the $100 refills await.


One Response to "Buying technology? Consider all costs"

  1. Daniel Humphries   June 23, 2011 at 2:38 am

    Great points, Mr. Benjamin. In considering TCO and weighing whether or not to buy extended warranties and maintenance and service agreement and the like, I tend to put more weight (and throw more money) towards “mission critical” systems — those parts of the operation that would have a direct and immediate impact on the revenue stream should they crater.

    In our business, we often will be without a workstation or a printer for a day or two without much impact on the overall operation. On the other hand, loss of network connectivity or an outage of one of our production servers for even a few hours means lost dollars we will likely never recover. For those systems, I don’t hesitate to exchange greenbacks for the peace of mind that comes with service and maintenance agreements.