This week I have been working with three little words - words that often inspire the CFO, but bring fear and dread to the CIO.

Here they are - “Total Cost of Ownership” (TCO). If you remember, we struggled to deliver TCO figures before the great cloud invasion - so, how are we doing now?

Well, a friend and colleague has been working on developing TCO figures for the software used across his organisation, and when I saw the graphs that he had produced, I got quite excited - in fact excited enough to offer mathematical support and to strongly encourage him to submit a paper for the upcoming NZ government IT conference.

My colleague had plotted over 300 key software applications used across the organisation by cost, and he noticed a familiar curve, first observed by one Mr Vilfredo Federico Damaso Pareto. The Pareto principle isn’t rocket science (thankfully 4 out of 5 rockets don’t crash and burn) - but fitting a curve to any empirical data is gnarly. This is not an exercise for the faint hearted, but the results are rewarding.

Of course, you should not make outsourcing decisions based on initial cost alone. My colleague overlaid his original graph with support hours and support calls per application, and spoke to his finance department to understand how different application related costs (initial and ongoing) were accounted for. Though the final data was based on a number of guesstimations, it threw up some useful patterns, reflecting average behaviour. (It is interesting to see how many support hours are still burnt on free or nearly free software.)

Significantly the overlaid data resulted in a curve showing a handful of expensive applications trailing quickly into a long tail of “the trivial many”. It is to be hoped that the expensive applications will include your mission critical software and highly likely that your trivial many will include groups of applications with roughly the same functionality that can be consolidated. Depending on the nature of your business (tech start up through to bank, law firm to hospital), and the strength of your IT capability, you will either want to keep your mission critical applications as close or as far away as possible.

The key message of this post is that this exercise will provide an invaluable insight into your application costs, and will fuel some interesting discussions around simplifying your environment, picking candidates for outsourcing / cloud servicing, and tailoring your support to better serve your core business functions.

And then of course, you can apply the same approach to other parts of your IT empire...

About the author

An expert in corporate governance of IT and sustainability management, Alison Holt led a group that identified market needs, assessed academic research and delivered relevant international standards. She has worked internationally in a variety of roles from systems analyst through CIO to IT director and is author of Governance of IT.

In this video, Alison talks more about IT governance, the value of IT and why we need to care about it