The long good buy


29 Oct 2003

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How much does a PC really cost? If you’re the embattled head of an IT department that question may have been taxing you a lot lately. Many organisations have been toiling along with the same hardware for the past number of years, mindful that an upgrade costs money that few these days can easily afford. So they make do and mend with what’s already there.

Hands up who’s been eking out their working existence on the same desktop system for the past three years or more? Many in large organisations only have the vaguest notion what a post-Y2K PC looks like. Maybe they’ve seen one advertised on TV. The Year 2000 problem (remember that one?) was probably the last compelling reason many businesses had to overhaul their IT hardware inventory. Technology analyst firms report that this event in many cases marked the last time that large-scale IT swapouts took place.

With no major crisis on the horizon — just the opposite, in fact — there’s been little incentive to change. If it ain’t going to break, why fix it? In fairness, the economic downturn probably put paid to a few desktop upgrades (or technology refreshes in industry parlance) that might have come and gone in that time.

So you will either be very pleased or dismayed to hear that new research from analyst firm Gartner shows that there is very little difference between a PC kept for three years and one kept for double that length of time. How’s that for a compelling reason to address the situation any time soon?

Examining total cost of ownership (TCO) can be a useful way of viewing IT hardware that goes beyond seeing it simply as an asset on the balance sheet that is worth less and less with each passing year. Simply put, TCO measures the value that a PC offers to a business and encompasses not just the purchase price but more importantly the many additional costs around it. Gartner first coined the term back around 10 years ago and its definition is updated regularly.

In its most recent visit to the topic, the firm identified a shift in how these costs apply over the lifetime of the hardware. For the first two or three years, direct costs are in force. According to Gartner, these include the capital costs of acquisition, followed by administration and operations (for example service desk and maintenance). These costs are generally within the IT budget and can be directly attributed to the PC.

Then, three years into the PC’s working life, the switch happens. Direct costs are replaced by indirect end-user costs. Typically these aren’t covered within the IT budget and they comprise issues such as downtime or ‘end-user operations’ such as self-support, peer support and casual learning.

What’s significant is that Gartner has felt the need to analyse the cost of a PC in years four, five and six — the firm stated expressly in its recent missive that businesses are keeping their PCs for longer.

On the other hand, we have Moore’s law, which states that the number of transistors on a chip doubles every couple of years. It’s the foundation stone on which the IT industry’s insatiable rate of change is built and is indirectly responsible for the never ending cycle of newer, faster PC hardware that tends to arrive on the market quicker than its customers’ ability to absorb and exploit it.

Why should you feel like the only choices open to you are to get on board the treadmill of costly and frequent hardware upgrades or else you consign your business to the dark ages? There may be another way that makes the most of the best technological advances without breaking the bank.

With that in mind, IBM’s recent announcement of a PC procurement scheme seemed like a laudable attempt to help businesses past the expensive capital acquisition costs of buying new systems and then having to pay in large amounts for their upkeep. Under its new offering, the cost of hardware, software, services and financing are all wrapped up together and spread out over a period of time. The entire package is then made available for a fixed monthly fee.

I would take issue with the expected cost of €55 per month for small to medium-sized enterprise customers as promised in the press release. This is the “starting at” price, one calculated on the basis of a user site with something like 200 users spread across three locations. This description hardly falls into the category of SME as we in Ireland know it, but the point is well made. Credit IBM for focusing on the TCO issue. Even if its €55 per month figure is a generous estimate, it still leaves plenty of margin for savings. Findings from the Meta Group, as quoted by IBM, put the annual cost of PC ownership anywhere between US$2,000 and US$5,000.

While the new publicity this plan will receive will be more than welcome, it actually doesn’t beg the question why someone hasn’t thought of this sooner. They have. IBM is actually one of many vendors offering creative options for financing IT purchases. Other technology suppliers — Dell, Siemens and Hewlett-Packard among them — can arrange financing deals and independent players not affiliated to any IT provider are also on the scene.

The principle is much the same as IBM’s plan: the costs associated with acquiring hardware are covered by a lease, which basically works like a hire purchase agreement. The buyer pays in monthly or quarterly instalments, upfront or in arrears for an agreed fee at a fixed interest rate. Some deals even have provision for upgrades within the lifetime of the contract.

By comparison with our European neighbours, hardware still accounts for a high proportion of IT spending in Ireland, but lately software and services have been an increasing proportion of technology outlay. Many lease arrangements cover these options.

It’s a much more sensible way of procuring IT — after all, haven’t businesses been buying cars or property that way for years? It still has to catch on, though, and it fights against entrenched interests. Many IT managers like to feel that they own the hardware that sits in the server room; a mindset that won’t change overnight. But when the alternative (ie paying for the lot upfront) means delaying a vital technology purchase because “the budget simply isn’t there”, then there’s little sense in following the path of lease resistance.

By Gordon Smith