Hidden costs of asset life cycle management

Understanding the scope and impact of hidden and indirect costs to the total cost of ownership (TCO) of IT equipment is a critical part of any purchasing decision. Often comprising more than 50% of TCO, organisations must make plans to curb this expense to see maximum benefit from spend.

“Proper planning and management of the asset life cycle can produce a tangible impact on the cost associated with ownership,” says Ulze van Wyk, managing director at Africa e-Waste.

Direct costs can be fairly accurately calculated, as they comprise predominantly fixed-price expenses. Hardware and software, support, consumables, network-related recurring costs (such as Internet access), facilities, and administration can be budgeted for on a monthly or yearly basis. “It is important to note,” says Van Wyk, “that over 50% of the direct cost of a desktop or laptop computer goes to support, and the more complexity provided to the end-user by way of applications or mobility, the more that cost skyrockets.”

Indirect costs, however, cause a much bigger headache for financial administrators, as many of these are hidden, and typically, desktop and laptop computers have higher indirect costs than direct costs.

“The TCO of general office PCs range from R3 000 to R10 000 per unit per annum. Some studies indicate the indirect cost of ownership can be two-and-a-half to three times higher than the direct cost,” she says.

Indirect costs, including those overlooked as they are well “hidden”, include scheduled and unscheduled downtime. Calculated on a per hour, per employee basis, organisations can lose thousands of rand daily. This is particularly true for organisations dependent on the knowledge worker, such as law and audit firms. Sub-optimal functioning due to outdated applications and slow computers de-motivates staff and slows their production. “But possibly the most expensive of the indirect costs,” says Van Wyk, “is the cost of retirement.”

The retirement cost of equipment, combined with downtime and sub-optimally functioning machines, can raise the TCO to the point where it tips the balance between cost and business benefit.

“Getting a handle on these three areas of the asset life cycle, and streamlining the direct cost of support, will considerably improve an organisation's return on IT investment,” she says.

Asset life cycle optimisation takes into account the duration hardware should be deployed, before cost outweighs advantage.

Timely replacement has proven to be a critical component in this practice, despite most organisations trying to extend refresh cycles, as the perceived replacement cost is too high. However, the inverse is true when the cost of support is taken into consideration. As hardware starts to reach its end-of-life (EOL), support and maintenance costs increase exponentially, says Van Wyk. “Replacing hardware as it reaches EOL reduces maintenance costs to the degree that it offsets the capital outlay.”

In addition to escalating support costs for aging hardware, security risks increase, while user productivity decreases. Older hardware is also often limited to older software versions, which again, has an adverse impact on the cost savings associated with a standardised and simplified environment.

However, Van Wyk warns, companies do not fully understand the costs associated with retiring or decommissioning hardware. “This is the step in the asset life cycle optimisation plan that often goes unchecked. Organisations are finding it one of the most onerous steps in the cycle, as it has been inadequately planned for,” she says.

Gartner Research, in 'Gaining Efficiencies With PC Lifecycle Management', concludes that a retirement and disposal strategy “should be an explicit part of the life cycle management”.

Among the direct costs of the retirement stage of life cycle management are operations - an administrative IT function, as skilled resources will need to take the asset offline and replace it; disc sanitisation; storage; and logistics. Indirectly, organisations must consider downtime, and more importantly, security risks and legislative breaches should decommissioned assets fall into the wrong hands.

“Recent legislation has made it crucial for organisations to dispose of decommissioned electronic equipment in an approved manner or face prosecution,” says Van Wyk. “Additionally, privacy laws demand the proper sanitisation of hard drives. Fines imposed on organisations found in transgression of either of these acts could increase TCO by between 50% and 100%.”

Because the retirement of assets pose some real threats to organisations, many companies are opting to store EOL equipment - which brings with it an additional set of monthly charges by way of rental of warehouses and security.

“Refurbishers which have been approved by the Electronic Waste Association of South Africa are in a position to decrease the TCO of IT assets by recouping some of the costs for clients through channel partners. Furthermore, risks associated with data leakage are eliminated via thorough disc sanitation.

“Companies don't realise the value of their retired assets. By partnering with an approved refurbisher, retirement costs can be understood, and vastly reduced.”