TCO vs. ROI: Remember transition costs

By Randy Kerns, Monday, March 19th 2012

Categories: Analyst Blogs

While talking to value added resellers (VARs) recently about selling storage systems, I noticed their presentations about vendor products featured return on investment (ROI) calculations.

These ROI calculations focused on cost of the solution, savings in maintenance, floor space, power, and cooling, performance gains that enabled business expansion or consolidation, and savings in day-to-day administration.

But limiting the economic view of buying new storage technology to ROI does not represent the true financial impact of the transition. Investment in technology also requires a time element to be considered. A specific technology has a lifespan that is dictated by other factors such as warranty periods (and associated service costs), technology replacement and the subsequent unavailability of the earlier technology.

For these reasons, information technology professionals generally focus on total cost of ownership (TCO) when evaluating storage. TCO includes the time element and the transition costs. Notable factors included in TCO calculations include product costs divided by the number of years the product will be in service, data migration costs and operational and administrative costs over the lifespan of the product.

TCO gives a more accurate look in the evaluation of a technology deployment. For example, the cost of one technology product may be less expensive than another but the transition costs may actually make it more expensive. The lifespan is a big factor. If the lifespan is relatively short, that could make it hard to base a decision on product cost.

Vendors recently began trying to address transition cost in storage systems by adding a built-in capability to non-disruptively migrate data to the new technology system. This has become a differentiating characteristic of primary disk storage systems but its impact is limited in archiving and non-existent in tape systems.

Evaluating storage technology solutions must go beyond the simplistic cost of the solution and use of a purely economic measure such as ROI. More detailed evaluation must be done with different factors. Looking at the past technology change rate can be a good predictor for assigning the longevity expectation. TCO, with the correct elements included, can reflect the real costs between different storage technologies and assist in making a more informed decision.

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