Monday, October 03, 2005

Return on Investment V/s Total Cost of Ownership

You can’t invest large amounts of capital on the promise of productivity gains, because productivity gains can be only measured in retrospect. It makes more sense to buy the more cost effective stuff that does the work well. What you can only be sure of (at least to some extent) is that the stuff you have bought will help you do things faster, with less errors or at lower cost but that it will result in more sales or profit is much harder to predict. Therefore it makes more sense to invest using the Total cost of ownership (TCO) computation rather than on a prediction of a certain Return on Investment (ROI).
The TCO as opposed to the purchase/transaction price (which can be deceptive), covers the upfront capital cost, set-up cost, running cost, cost of renewal etc. All the costs you’ll incur through the lifecycle of its use.
In fact a lower TCO makes a higher, faster ROI more possible. That’s all one can be sure of.
Of course new technology that completely alters the economics (creating structural changes) is an altogether different matter and may well be worth the risk.

1 comment:

Michael Sheridan said...
This comment has been removed by a blog administrator.