5
Total Cost of Ownership
DANIEL F. COWAN
It seems to be well known that a computer-based information system is costly to acquire. Less well understood are the costs associated with maintaining and operating a system over time. Several large laboratory information system ven- dors had no ready answer, even in general terms, to the question “Do you offer any advice to potential clients about the costs of ownership of your system?”
This is not very surprising, as even large, computer-dependent industries often have only the vaguest notion of the true costs of ownership of their systems.
According to one estimate, each Microsoft NT workstation typically costs an organization $6,515 per desktop per year,1 of which capital hardware and soft- ware costs account for only 25%. Some of the remaining 75% of costs, which may be overt or hidden, are associated with management and technology support.1 The Gartner Group, a consulting firm, says that the five-year cost of a personal computer is $44,250.2 Vendors not are generally expected to provide much infor- mation about cost of ownership beyond the services they provide under contract, as costs are mainly related to how owners choose to use and support their system rather than to any particular computer characteristic.
Total cost of ownership (TCO) is an accounting method or model used to understand and control computing costs while maintaining the productivity of the information system throughout its life. There is surprisingly little writ- ten about TCO in comparison to other management issues, especially as they relate to the laboratory. Most discussions of TCO focus on the computer itself, in particular the desktop workstation and network. This approach seri- ously underestimates the TCO of a functioning laboratory information sys- tem, so the discussion that follows goes considerably beyond those limits.
TCO should be understood to encompass all costs of owning and operating an LIS. By collection and organization of fiscal data, the manager of a com- puter-supported information system is enabled to understand and control the direct (budgeted) and indirect (unbudgeted) costs incurred by owning and operating it. All costs of acquisition and operation are determined for the system throughout its life span. Assessing TCO is an important function of system management, the more so as information systems are increasingly based on networks, and a progressive shift toward complex client/server sys-
tems is taking place. The fundamental questions are “Where does all the money go?” and “Are we getting a reasonable added value for dollars spent?”
System managers must be able to proactively monitor and maintain all the hardware, software, and peripheral devices in the technology that supports the information system, as well as identify personnel and other costs of operation needed to produce the information product. This task has become much more complex since the time when systems were based on inflexible host mainframes and dumb terminals. Relatively little continuing oversight was needed, as the mainframe and its dumb devices was what it was, with little opportunity and typically little need for “management.” This means not that owning a mainframe is cheap but that the costs, which are high, are generally easily recognized. The idea of TCO, of course, contains a certain element of fantasy, as operating costs can never be predicted with certainty; they can only be estimated based on experience. Few business operations do analysis in the depth needed to under- stand TCO, and analytical tools are not well developed, although several work- station and network management software products have appeared on the market.
Many of the more important considerations, such as access to professional ser- vices, vendor’s market position, service-level agreements and availability of ap- plications, as well as other intangibles like effect of innovation on consumer satisfaction, are not really quantifiable.
It is also important to recognize and accept the mind-set that the informa- tion system is a business-driven activity, not primarily a technology func- tion. That is, all decisions made by IS managers must be based primarily on the needs of the business the information system serves, not on the desires of the technical staff to be state-of-the-art. The ability to relate IS activity di- rectly to business and service needs greatly improves the IS group’s ability to compete for capital and personnel resources in the enterprise. Also, seeing the information system as an integral component of an enterprise’s success tends to shift focus from the cost of the system to the comprehensive and long-term value added by it. From a business perspective, in the long run it doesn’t matter much if the system costs a lot so long as the value it adds substantially exceeds its cost. In hospitals and laboratories however, in which operating margins are narrower and narrower and capital resources increasingly con- strained, close scrutiny of costs and recognition of opportunities for improved efficiency will always be an important issue.
Types of Costs
Direct and Indirect Costs
Understanding direct costs ought to be relatively simple, as they tend to be specified in budgets. However, the budgets may not accurately reflect inven- tory, personnel costs, and items such as repair rates. One suggested model1 for identifying direct costs uses five categories:
· Hardware and software, including capital purchases and lease fees
· Management (network, system, and storage administration, labor and outsourcing fees, management tasks
· Support (help desk, training, purchasing, travel, maintenance contracts, overhead)
· Development and customization
· Communications fees (lease lines, server access)
The Gartner Group’s analytical model,2 accepted by many as the industry standard uses four categories:
· Capital costs
· Administrative costs
· Technical support
· User operations
Each of these categories is further divided into discrete cost items, with information provided by clients and by the group’s own research.
Indirect costs are much harder to quantify than direct costs, as they are not budgeted in ways attributable to an information system or may not be budgetable at all. They include costs incurred by users who do their own support or provide help or advice to peers, time spent learning applications, and unauthorized time spent playing games, surfing the Internet, and so on.
Productivity lost to either scheduled or unscheduled downtime is also an unaccountable indirect cost. It is important to understand that since they are unaccounted for, indirect costs tend to grow with little or no control. It is reported1 that more than 50% of cost growth is off the formal IS budget. It is also important to understand that excessive and ill-advised efforts to control budgeted costs by reducing support services will surely result in an increase in indirect costs, as users spend more and more time trying to support them- selves, probably not nearly as well and efficiently as a professional support group could. One study suggests that budgets for hardware exceed budgets for support by 4 to 1,3 while the real life cycle cost of a personal computer in a business operation is closer to 10 times its purchase price.4 Productivity lost to downtime will also increase as IS management and support personnel be- come increasingly overextended.
While TCO is a relatively recent introduction, applied mainly to personal or desktop computers and their network linkages, the ideas incorporated into the cost analysis can be applied to mainframe-centered systems as well. It is almost immaterial whether the LIS is based on a mainframe and terminals, or is a complex mix of servers, personal computers, and networks. TCO thinking is applied mainly to systems already in operation. A more global approach to TCO suitable for the laboratory includes three categories: selection, purchase and installation, and operation. Few laboratories are still not computerized to some degree, so selection from scratch is increasingly unusual. However, se- lection processes might apply in a computerized laboratory considering ma-
jor system revisions, such as changing vendors, integrating several laborato- ries, or other, nonroutine operations that involve the participation of non- members of the LIS staff who can be considered fixed costs of operation.
Attribution of costs depends on the philosophy of the larger organization.
For example, it makes sense for all computerization projects, no matter which part of the organization is involved, to be allocated against an institutional information services cost center. It makes equal sense to allocate all costs of laboratory computerization to the laboratory. So long as the issues of deci- sion and control are not involved, it really makes no difference where on the ledgers the costs appear. Some aspects of laboratory computerization—for example, cabling—may be allocated to institutional IS, as the cables may carry traffic for other services, such as radiology and pharmacy, while others that are more function-specific might be allocated to the laboratory. Cost shifting is common, although cost shifting is of course not cost avoidance, a point that may not be appreciated at the lower levels of an organization.
Selection
The costs of selection include the salaries of the people who devote time to the process of identification of potential vendors; preparation of RFI and RFP and the evaluation of vendor responses; the time devoted to preparation for meetings and participation in meetings, meetings with vendors; and travel for site visits (fares, hotel and subsistence, hours spent). The process of in- depth review of laboratory operations has been described earlier (see Chapter 2). This kind of review should be done periodically, whether or not an LIS is in development, as laboratory missions and resources evolve. It may be con- venient to allocate all or part of these costs of review to the development of an LIS. A relatively simple method for determining these costs is to have all participants keep time logs of all activities relating to system selection and multiply hours spent by salary per hour. Typically, these salary costs far ex- ceed costs of travel and other expenses. Some institutions employ a consult- ant to help plan the selection process, develop the RFP, evaluate responses, and construct and negotiate the contract. Consultants may be retained for the selection period at a flat rate or, more commonly, at an hourly rate, with compensation for all expenses incurred. Rates begin at about $200 an hour.
The selection phase of the process is completed on the signing of a purchase agreement.
Recognizing that the most costly aspect of the selection process is the accumulated hours of time spent examining laboratory operations and identi- fying and studying the offerings of potential vendors, it seems reasonable to involve only a few people in it. This could be a serious mistake, as few in the laboratory and certainly no one outside the laboratory have both the breadth of vision and the depth of detailed knowledge needed to properly study labo- ratory operations and identify vendors who can best meet the needs of the
laboratory. These studies have to be inclusive, not only because of the amount of knowledge and experience that must be brought to bear on the problem but also to foster a broad sense of “ownership” of the computerization project.
There is too much disruption, too much work, and too much aggravation involved in computerization for the laboratory staff to feel that something has been foisted off on them by people who don’t understand laboratory operations. Certainly administration has the legal authority to make deci- sions with little input from the people most affected, but the distinction be- tween that which is legal and that which is accepted as legitimate is an important one. It can mean the difference between success and failure of the project.
The problem, then, is not whether to be inclusive or not but rather how to manage meetings, organize information flow, and provide appropriate staff support for the participants. All meetings should be called for specific rea- sons, follow set agendas, be held to scheduled times, and be properly min- uted. All opinions must be considered, but rambling monologues should be controlled. During the course of the study and selection process, certain indi- viduals will emerge as leaders; some will prove to have a knack for the par- ticular logical approach needed for the details of computerization. These are the people who are prime candidates for a site visit team and for future mem- bership on the LIS staff.
Purchase and Installation
Purchase and installation costs include the price of the hardware, which be- comes the property of the purchaser as a capital asset; preparation of the location in which the computer is to be placed and wiring of the facility, which include labor costs both inside and outside the laboratory; training of the staff; development of tables and other applications functions; and instru- ment interfaces. Installation costs may recur if new analytical instruments requiring new interfaces are brought into the laboratory. After the initial setup period new instrument interfaces can be thought of as either extended instal- lation costs, as part of the capital cost of the new instrument, or as part of continuing operations, as suits laboratory management.
While the hardware devices become the property of the laboratory, operat- ing systems and applications software remain the property of the vendors who permit use in return for licensing fees. Fee structures vary with vendors, but a common arrangement is for there to be an initial licensing fee, with continu- ing maintenance charges, which may come due monthly, quarterly, or annu- ally, depending on the terms of the contract. Maintenance includes periodic modifications or upgrades of the performance of the applications and vendor support in the event of a problem with the hardware or software. License and maintenance fees may be scaled to reflect such features as the volume of the laboratory, the number of peripheral devices supported, the number of service
sites, and other components of use. These are all specified in the initial con- tract, so some estimation, often quite accurate, can be made.
Actual installation requires many hours of time from laboratory personnel and vendor engineers alike. Vendor charges for installation may be a single package cost or may be calculated by the hour; the charges, of course should be defined in the contract.
Development of SOPs (operations, validation, applications, and so on) was discussed in Chapter 3. In a large, complex laboratory, upwards of 100 LIS- related SOPs are needed to cover installation, validation, and operations both in the central LIS area and in the laboratory. Time logs may be helpful in calculating the cost of production of SOPs.
Training is an essential component of the operation of an information system.
If training is deficient, things will not work right, and therefore it is a false economy to underfund training. Exactly how much training will be needed by each em- ployee depends entirely on the complexity of the work the employee does on the LIS and the frequency with which equipment and operating procedures are changed. Training costs should be budgeted up front. If they are not, they will be incurred as indirect costs of self-instruction, peer support, and inefficiency.
Operation
Operation of the laboratory information system requires a dedicated staff, a budget for maintenance and operations, and capital costs. Organization of the LIS-related staff can vary widely depending on management philosophy.
Some laboratories have all LIS-related people in a separate division; others keep the central group small by design. The central group works on system issues. Laboratory section-specific operations may be the purview of spe- cially trained technologists (sometimes called database coordinators) who work in the specific laboratory sections. The philosophy here is that people who are closest to the work understand it better and will therefore support it better. Also, time not spent on specifically LIS issues can be used in other division-related business. A technologist’s time can be allocated for budget purposes between LIS and the division, depending on actual hours worked.
Unlike selection, purchase, and installation costs, operational costs con- tinue throughout the life of the information system. In general, operating costs include the salaries of the information system staff, maintenance fees, office supplies, utilities, paper and electronic media, and replacement, repair, or upgrade of equipment. In many businesses and industries, the cost of ward- ing off or repairing the damage done by crackers is a significant, if unbudgeted, expense. Also, an educational program for laboratory staff must be planned and carried out, and the LIS staff must have their skills maintained. Typically, this means either bringing in vendor trainers to conduct classes or laboratory staff traveling to the vendor’s training site. In either case, travel costs (time, transportation, maintenance) must be included. All these costs are budgeted and readily accountable.
Ways to Manage TCO
It is important to keep a broad view when managing TCO. Remember that the TCO is the total of all costs, direct and hidden, associated with the informa- tion asset over its life cycle. If a broad view is held, it will become easier to recognize that shifting costs from one center to another usually does not result in savings; indeed, it may require additional outlay of money, time, or effort. Develop an asset management program.4As far as possible, recognize costs and build them into the budget. Be attentive to four issues:
Know what you have. Develop and maintain an inventory of all hardware and all applications software. Understand who is doing what. Identify which assets are owned, which leased. Determine what is being used and how it is being used.
Understand how information assets are being managed, and plan for improve- ment. Be able to predict what will be needed and when.
Determine which assets must be tracked, and decide which are not worth the cost of tracking them. Develop a multiyear asset replacement plan.
Identify sources of potential savings. Avoid paying for things that are not used, and don’t overpay for things of marginal value. Compare the costs of service contracts with the cost of in-house support.
Details follow.
Standardize
Limit the system to machines and software from as few vendors as possible to take advantage of economies inherent in standardization. This allows sup- port staff to concentrate in depth on a few items rather than maintain a shal- low acquaintance with a large number of items. Require all vendors to follow industry standards for hardware, software, and communications devices. Sev- eral vendors provide management tools. Simple Network Management Proto- col (SNMP) is one widely used network monitoring and control protocol. In the SNMP, protocol data is passed from hardware and/or software processes (SNMP agents) that report activity in each network device (hub, router, bridge, and so on) to the workstation console used to oversee the network. This information is captured in a management information base (MIB), a data struc- ture that defines what can be obtained from the device and which processes can be controlled, e.g., turned on or off. Microsoft offers a product, SMS, with many of the same functions as SNMP.
Desktop Management Interface, or DMI, is a management system for mi- crocomputers initiated by Intel that provides a bidirectional path to interro- gate all the hardware and software components within a computer system. A memory-resident agent works in the background. The agent responds to que- ries by sending back data contained in management information files (MIF) or by activating MIF routines. Static information in an MIF includes items
such as model and serial number, memory, and port addresses. Active MIF routines can report errors to the management console as they occur or report on the content of ROM or RAM chips.
While DMI is designed to be a complete management system, it can work with SNMP and other management protocols. DMI can be used to fill and update an SNMP MIB with data from its MIF. A single work station or server can contain the SNMP module and service an entire LAN segment of DMI machines. One very practical and cost-avoiding feature of a system in which all microcomputer components are DMI enabled is the ease of adding new devices such as adapters and controllers. DMI-enabled devices can report their status and conflicts can be identified on installation.
One important way costs may be reduced is to identify a standard software load—a group of programs used throughout the operation that can be collated to a CD for simplified loading. The initial software load can be followed up by an automated upgrade system. Application installation managers keep all users at the same upgrade level automatically. Whenever a workstation is turned on, it goes to the network manager for an automatic download of upgrades. This kind of system works best in an environment in which all participants are supported by the same software. Other strategies have to be developed for persons whose work requires specialized, nonstandard software.
Maintain and Upgrade
Keep the system components as up to date as possible. Newer machines may be more capable of carrying out tasks and are likely to require less mainte- nance and repair. Personal computers (microcomputers) should be regarded as disposable devices with a finite, usually short, life expectancy. While they may formally be counted as assets, they really are expense items, equivalent to paper, toner cartridges, and the like, since they have a short life and little or no value when replaced. Electromechanical devices wear out and must be replaced. Using standard releases of software throughout the laboratory sim- plifies support and reduces the likelihood of incompatibilities.
However, avoid fads, and do not be the first to try something new just because it is available. Do not upgrade any more often then is necessary. If the system is functioning well and business needs are relatively flat, there is little point in accepting the costs of upgrading, as compared to maintaining equip- ment at the current level. Following are the essential questions:4
· What do I need to know about my IT assets to make rational business decisions?
· How am I managing assets, and what can be improved?
· What assets should I track and at what cost?
· What is the payback, and where will savings come from?
The need to keep system components as up to date as possible does not justify using untested technology. The decision to engage with a vendor in
developmental work (alpha or beta site testing) should be taken only after careful consideration of time and aggravation costs. An agreement with the vendor about cost sharing and compensation to the laboratory for helping develop a salable product is always in order.
One strategy to consider is leasing all or most of the system’s hardware.
Leasing has the advantage of assuring upgrades under the contract. It also has the effect of moving hardware from capital budgets to operating budgets, which may be an advantage in a system in which capital dollars are increas- ingly constrained.
Plan Support Carefully
Keep the support structure slim by using vendor on-site support programs and by limiting the use of older machines, even if they are capable of carrying out routine tasks. The more standard the machines, the smaller the parts inventory must be and the more expert support staff can be. Use applications software (if not supplied by the primary LIS vendor) for which there is on-line help from the manufacturer. Develop “help desk” functions in order to make contact of support personnel more efficient. Develop a library of help scenarios or algo- rithms for common problems.
Systematically Replace Manual Systems
Use software (e.g., relational databases) to replace manual inventory systems, not only of personal computers, other terminal devices, and software but also laboratory equipment and supplies. Electronic inventory systems will relate the cost of ownership of the information system to a wider functionality in laboratory management and can help to reduce costs in other areas of the laboratory. Concentrate cost reduction efforts on the existing installed base of hardware and software, and do not pursue unproven solutions that require fundamental changes in either.
Maintain Openness
Avoid closed, proprietary single-vendor systems if at all possible, since they tend to lock into narrow solutions and limit choices. When you are locked into a single vendor, you lose bargaining power.
Exercise Good Routine Business Practices
Build business practices around a management information system that keeps important inventory, contract, warranty, expiration date, and other important information organized and readily accessible. Develop an early warning sys- tem that will prevent being taken by surprise, especially by matters such as contract expirations that will take a long time to resolve.
Identify invoice errors. Invoice errors are common and may result from changes in the vendor’s organization, ownership, or accounting systems.
Be especially attentive to fees for software use and maintenance, as they are not matched by the delivery of physical assets.
Avoid penalties for late payment and for violation of other contract provi- sions, such as use of the product beyond the contracted limits. The time for a change of mind is before, not after, a contract is signed.
Periodically evaluate the vendor’s prices and terms of sale. Special offers may have lapsed, and other vendors may offer a better product at a lower price. Do not allow friendship with a sales representative to influence business decisions.
Pay close attention to lease expiration dates. If taken by surprise when a long-term lease expires, one may be faced with high month-by-month payments while processing a renewal.
Identify underused hardware and software. Eliminate, replace, or consoli- date to achieve more efficient use.
Do not overpurchase equipment. Evaluate equipment being replaced for reassignment to a lower-demand use within the department, providing maintenance and support are not major considerations.
Do not spend time evaluating hardware or software when there is little chance of a purchase within a reasonable time. Save that effort when actual purchase is pending.
Justifications Based on Value Added
Laboratory information systems should never be justified as cost-savings devices. There is no convincing evidence that, if properly accounted, com- puterization of a laboratory will save the hospital money. Jobs that go away in one area because of automation usually reappear somewhere else, usually relating to support of the LIS. Our own LIS operation employs nine people, none of whom were needed in their current jobs before the advent of the system. Computerization is justified on the basis of value added to the opera- tion of the institution. More work can be done with the same number of people (improved efficiency, not lower costs). The generation and reporting of laboratory results can be speeded up, effectively limiting the process from the time the specimen arrives in the laboratory to the time the analytical process is completed, eliminating time spent in generating, delivering, and posting paper reports. Data is better organized and more accessible. Consum- ers of the service are better served. An extremely refined management system can be developed without reliance on large numbers of people doing things by hand.
In summary, the issue is not whether an LIS is cheap, because it is not, but rather whether it is worth what it costs to acquire and to operate.
Chapter Glossary
desktop management interface (DMI): Management system for microcomputers that provides a bidirectional path for interrogating all the hardware and software components within a computer system. A memory-resident agent works in the background. The agent responds to queries by sending back data contained in management information files (MIFs) or by activating MIF routines
direct costs: Recognized, budgeted costs of operating an information system. Different models are used. One uses five categories: hardware and software, including capital purchases and lease fees; management (network, system, and storage administration, labor and outsourcing fees, management tasks); support (help desk, training, purchasing, travel, maintenance contracts, overhead); development and customization; and communi- cations fees (lease lines, server access). Another model uses four categories: capital costs;
administrative costs; technical support; user operations.
indirect costs: Unbudgeted and therefore largely unaccountable costs associated with op- eration of an information system. They include costs incurred by users who do their own support or provide help or advice to peers, time spent learning applications, and unautho- rized time spent, for example, playing games; productivity lost to either scheduled or unscheduled downtime.
management information base (MIB): Data structure that defines what can be obtained from a computer or peripheral device and which processes can be controlled; e.g., turned on or off.
TCO: Total cost of ownership is the total of all costs, direct and hidden, associated with the information asset over its life cycle.
References
1. Microsoft TechNet document Total Cost of Ownership (TCO) Overview. Feb 1998 2. Hildebrand C. The PC price tag. CIO Magazine, Oct 15, 1997. CIO.com/archive/
enterprise/101597_price__content.html
3. Sherry D. The total cost of ownership. Summit OnLine Internet document, 1998 summitonline.com
4. Shoop K. Asset management demystified. Internet document, 1998 supportmanagement.com
