Feb 26, 2008
Total Cost/Total Value: How do you Choose Technology?
Last summer my 1999 Honda Passport was finally showing some signs of old age—the dashboard went completely dark and stopped giving me those vital metrics, the headlights stopped working, there were some awful noises coming from the hood and it began to smell like burned oil--and so I found myself looking for a new car. The process of choosing a car is of minor interest here because where some similarities between that and a topic I am to discuss at XPLOR Document University at On Demand in a couple of weeks: “How do you Choose New Technology.”
Before a new technology is introduced into the environment, one must first assess the organization’s overall business objectives. These might include the need to boost productivity, quality, and profits, and almost certainly include the need to reduce costs. For me, it was: a) just getting to work and b) getting to work without people staring at my car. Having to get home before dark was also becoming problematic after the summer solstice. I was also getting tired of pouring money into the car, which was looking more and more like a bad bet.
Next, managers must identify steps or changes required to attain those objectives. The implications can be as simple as business process enhancements or as complicated as a total business transformation. It may even call for the formulation of an entirely new business model. For me, the move from a junker and a clunker to a smooth new ride was surely a life-changing event. The main question was how far was I willing to go?
Before a decision is made to purchase capital equipment—to adopt a new type of mail finishing system, for example—overall business objectives must be assessed, which includes not only the print operation and data center but also the marketing department, strategy, finance, IT, real estate and operations and various other departments, lines of business and perhaps dozens of other stakeholders.
No sound business decision is ever made in a vacuum.
For me, consideration #1 was four wheel drive. I need that because I live about three-fourths of the way up a mountain in the deep woods of semi-rural Connecticut and my driveway is a real tough climb in the winter. Some days I can’t drive up the driveway wat all ithout four wheels turning all at once. This consideration eliminated many, many kinds of otherwise eligible vehicles, including most hybrids, which I was hot on for awhile.
Does your organization have a “must-have” when it comes to new technology? Does it need to fit into your current environment? Does it need to be purchased, not leased? Does it need to be “state-of-the-art”? There are many possibilities for “must-haves” and you need to understand the main criteria of your organization before making a decision.
I also wanted a ragtop, mainly because I never had one before but drove a rental once on vacation and I liked being out there in the open with the wind blowing back what is left of my hair. Not a must-have, but a nagging desire. That, too, eliminated some contenders. In fact, at this point in the process there were only a few possibilities left.
I ended up buying an Audi A4 Quattro Cabriolet. It’s red, which I’m a little ambivalent about, not least because I feel like a target (I had never heard that red cars are more liable to get speeding tickets but I’ve since heard it’s a myth, knock wood). It’s an adorable car and I enjoy driving it, especially when the weather is warm and dry and I can put the roof down. More important, though, it has all-wheel drive (indicated by the quattro, get it?) and it’s been great this winter after several storms.
One of the ways that you can look at a purchase is by assessing total cost of ownership (TCO). A TCO assessment is inclusive not only of the cost of purchase itself but also the use and maintenance of the equipment, which includes the costs of training support, consumables, floor space, electricity, development, testing infrastructure, quality assurance, costs of disaster recovery, incremental growth and more. Once these are calculated, the cost of the equipment or technology itself may pale by comparison.
Collateral costs tend to add up quickly-- as I discovered this summer when pulled my new car up to the gas pump. I opened the gas cap and was faced with a little sign that said Use Premium Gas Only (91 plus) because lower quality gasoline can leave deposits on critical engine parts, which reduces engine performance. I’ve never used anything but Regular Unleaded in my life. I also found out that wiper blades cost sixty dollars apiece, which was not the case with my Honda Passport.
To better understand the concept of TCO, consider this simple (borrowed—I didn’t make this up) analogy of the purchase of a grapefruit from your local supermarket: ie., to purchase a grapefruit your cost is not only the price of grapefruit itself but also the cost of the energy and effort it requires for you to find out which of the many kinds of fruit you would prefer to buy; where you want to get it and at what price; the cost of travelling from your house to the store and back; the time spent in the store, the waiting on the check out line and the overall effort made to pay for the grapefruit. It should even include the cost of storage space in your refrigerator to keep the grapefruit fresh. That’s TCO: total cost of ownership.
When purchasing a printer, what are the toner costs? When purchasing an inserter, what is the cost of damaged or unusable envelopes? Last summer I asked the print/mail advisory firm Madison Advisors to create a TCO assessment of traditional inserting operations. They looked at four standard envelope handling functions to see how these cost components influence the total cost of utilizing pre-printed envelopes. The four functions are acquisition, holding, usage and obsolescence. How much is spent on printing envelopes? How much does storage space cost for storing pre-printed envelopes? How much does it cost to forklift dozens of boxes of material to the shop floor? How much does it cost to destroy those boxes and/or to eliminate the excess inventory?
There is another way to evaluate a purchase—by looking at its value. So let’s look at the same grapefruit purchase we made above in another way. Not only does a grapefruit taste pretty good but it also offers a good dose of Vitamin C and other nutrients. Vitamin C not only boosts the uimmune system, it also prevents the free radical damage that is associated with asthma, osteoarthritis, and rheumatoid arthritis. There is also a reduced risk of death from all causes including heart disease, stroke and cancer.
The rich pink and red colors of some grapefruits are due to lycopene, which appears to have anti-tumor activity. Among the common dietary carotenoids, lycopene has the highest capacity to help fight oxygen free radicals, which are compounds that can damage cells.
Phytonutrients in grapefruit called limonoids have been shown to help fight cancers of the mouth, skin, lung, breast, stomach and colon. Grapefruit also contains pectin, a form of soluble fiber that has been shown in animal studies to slow down the progression of atherosclerosis. In one study, animals fed a high-cholesterol diet plus grapefruit pectin had 24% narrowing of their arteries, while animals fed the high-cholesterol diet without grapefruit pectin had 45% narrowing. Naringenin, a flavonoid concentrated in grapefruit, helps repair damaged DNA in human prostate cancer cells, according to a lab study published in the Journal of Nutritional Biochemistry. Grapefruit provides a good source of fiber, prevents kidney stones…
I could go on.
In other words, one gets a lot of value from a grapefruit. This kind of framework for assessing the value of a given project is called total value of ownership (TVO). Employing this model will help you assess whether technology investments are well-aligned with business objectives, people, processes and teams.
Total value of ownership comes not from the technology alone, but from the fundamental changes it helps achieve for the business--changes that are enabled and perhaps even driven by the adoption of that technology.
Personally, I like it when strangers tell me they like my car. That makes me feel good. My kids love pulling up to a friends house or their school in our little red sports car with the roof down. Their happiness is a plus. My daughter and I even experienced an owl flying about ten feet over our head for several yards last summer, a sight we’d never have seen with the roof up: that was a wonderful experience.
Likewise, when an organization identifies a number of potential projects and compares them against other projects from the perspective of the entire organization, business units, and individual employees, the company has the opportunity to select the options that best meet its overall priorities and deliver the most value to the enterprise. Value goes beyond cost reduction to include revenue enhancement, improved product quality, higher levels of service, and overall customer satisfaction. Ideally, these evaluations should take into account all potential stakeholders, including individual employees, departments and business units, and customers. And if you work hard and plan correctly, you’re more likely to leave your competitors behind.
Communication associated with business transactions is becoming increasingly important as a vehicle for engaging the customer. Digital print technology continues to provide more flexible and personalized customer communications, improving customer loyalty through the use of more timely and relevant content. As variable data and the use of color grow in importance, organizations are increasingly looking at their document creation process as something more than just a necessary evil. It’s becoming a strategic asset worth making investments in to bolster future growth.
It’s difficult at best to determine the amount an organization spends on their document production process. For every dollar spent on capital equipment, another twenty dollars may be spent on supplies, service, procurement, IT support and infrastructure, facility costs and man-hours associated maintaining, preparing and operating the equipment. These costs get fragmented in other budgets and typically go unaccounted for by management.
So when Madison Advisors created their assessment of traditional inserting operations, they found that their analysis was complicated by the complexities and variations of the print/mail process, and further complicated by the lack the desire, discipline, or systems to reliably and accurately track and capture these costs on the part of most internal operations. Luckily, the external service provider market has more dependable cost metrics for these functions that can be used to create models utilizing the data.
According to their research, Madison Advisors says that the ability to eliminate pre-made envelopes by using Dynamic Envelope Creation can save just about a penny per mailpiece. If one were to extrapolate across the entire industry, eliminating pre-made envelopes would save close to half a billion dollars. Now that’s value.
Kind of like zipping around in a red sports car with the top down.