Although the total cost of ownership (TCO) is willingly used as a decision-making basis for IT investments, analysts at the META Group have determined that three quarters of companies have difficulty calculating transparent and therefore directly comparable TCO for the operation of ERP systems. The primary problem arises because the capture and accounting of IT costs are based upon different requirements and points of view. Only rarely does the usual structure of cost centers or cost element accounting automatically provide the cost data required for comprehensive calculation of TCO. And the corresponding publications use the most varied kinds of cost models to calculate TCO: models created by Gartner, META Group, or Forrester. As a result, the same customer can use different cost models to arrive at results that have been calculated correctly but show deviations in the key figure of “IT costs per user” to a factor of five.
Are considerations of TCO therefore obsolete? “On the contrary,” says Horst Plieske, TCO program manager at Capgemini. “TCO considerations should be made according to objective criteria, but also examine the individual situation and requirements of IT. For example, Capgemini’s reference cost model enables an objective comparison with key values typical to the industry. However, this consideration would be incomplete without an individual analysis of the cost drivers in the company being examined.” IT decision makers who want to lower their TCO require measurable values, a portfolio of various measures, and an overall strategic plan. Under the name “SAP TCO Initiative,” Capgemini offers a package of methods and tools to analyze the TCO for SAP solutions. The package consists of three elements: TCO Value Index, TCO Cost Analysis, and TCO Trajectory.
The road map to lower TCO
The TCO Value Index enables a preliminary, qualitative determination of the position in the index – after a brief analysis supported by a questionnaire. The index is based upon a database with comprehensive comparative information from the data of Capgemini’s customers, itemized by industry and company size. The index considers not only typical cost drivers, such as the number of productive SAP instances or the various system and database platforms in the company, but also the benefits toward which the company’s IT department strives. The TCO Value Index therefore fulfills benchmarking functions and simultaneously displays opportunities for optimization.
TCO Cost Analysis can also quantitatively capture the IT cost structures of a company. The required key figures are efficiently and systematically captured in workshops and structured interviews. The flexible and open cost model can compare the values determined in the analysis with existing industry benchmarks and Capgemini data. Customer-specific cost drivers are identified quickly; the cost structures become transparent. And TCO Cost Analysis also evaluates opportunities for improvement. In the value identification phase, the company works through an exact road map to determine measures to lower its TCO. This phase requires three to six weeks of intense project work. Capgemini offers its customers workshops in which they can use a TCO road map to estimate quantitative opportunities for lower costs and discuss alternatives for action. At the end of the workshop, the company has a measure plan with quantified cost–benefit effects. And the plan also contains recommendations for specific prioritization and scheduling.
Reducing costs by one third – with better service
What does a TCO road map look like in the SAP environment and what results can be derived from it? The answers, of course, depend upon the individual customer, although a TCO road map can be built from some typical sample actions. Experience with many projects has shown that two important coordinates significantly influence TCO: the degree of harmonization or integration between IT and the process landscape, and the strategy for procuring IT services, such as outsourcing considerations.
A sample project can clarify the procedure and potential of Capgemini’s TCO strategy. An international consumer electronics company based in France began a global program in 2000 to lower the TCO of its globally distributed SAP application landscape.
As a first step, the project team set up an international SAP Customer Competence Center (SAP CCC) as a central coordinating instance and a global IT governance structure. A template of how business processes should appear according to the Group’s standard and a pre-configured SAP R/3 solution that was already customized with the essential, standard processes of the Group formed the basis for the global harmonization of processes. Among other elements, SAP NetWeaver served as a uniform integration platform. During the rollouts to branches in individual countries, the project team harmonized the infrastructure. The team replaced almost 200 legacy systems with SAP solutions that had been tuned to each other. In parallel, the team brought the support organization together around the world and assigned application management tasks step-by-step to specialized Capgemini centers in France, Spain, and India.
The results were clearly visible. The current status of the ongoing conversion already shows a reduction in TCO of 35 percent – in the midst of increased IT penetration, an increased number of users, and an enhanced level of service.
Holistic TCO strategy
In the midst of all possible measures to reduce costs, companies must also attend to quality and risk considerations and how IT should support the company’s general strategy. Up to a few years ago, the belief that IT offered a strategic weapon in the fight for competitive advantage remained unbroken. During the recent period of weak growth, however, a downright mania for savings has raged in many companies. To counter this trend, a professional TCO road map places the cost–benefit effects of IT investments into a long-term context with the company’s strategy. The creation of the context should not be the task of IT management only. It demands a holistic discussion that includes user departments and upper management.
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