Selling Your Customers On Total Cost Of Ownership
Helping its customers understand all the costs associated with owning new computers and networking equipment
drives Select, Inc.'s revenues to $50 million.
When it comes to total cost of ownership (TCO), Bob Norton practices what he preaches. Norton, a network computer solution provider, spends much of his time educating his customers and potential customers about TCO (the cost of owning a product). He's even applied the TCO concept to his own company, Select, Inc. (Boston, MA). Norton uses computing equipment that offers a low TCO in his own business. He's streamlined his product offerings to those he believed could be sold and supported profitably, with a lower TCO.
"As a result, we are realizing at least a 20% savings year to year on networking products and a 50% savings on computer hardware," he says. Norton also eliminated Select's computer-repair service, because the cost of "owning" it outweighed the profitability.
Norton, Select's vice president and a partner in the company, says selling the TCO concept to his customers has been worth it. With 40 employees, Select expects gross sales of $50 million this year. Norton and Dana Zahka, president, founded Select in 1987. The company originally provided Unix-based network computing solutions for medium-sized companies. Today, Select provides network computing solutions to global, multibillion-dollar companies.
Understanding Total Cost Of Ownership
"Total cost of ownership is the sum total of all the costs associated with owning a product over a period of time," says Norton. "The initial cost of the product itself is only a small portion of its overall cost. You have to include support costs, such as maintenance and supplies, as well as loss of employee productivity when the equipment fails."
The period of time used to determine TCO varies. With rapidly changing technology, such as computers, Norton says measuring in terms of three to four years is realistic. To further illustrate the TCO concept, Norton uses the analogy of owning an automobile. "The purchase price of a new car may be $15,000. But over a five-year period, you will pay more than $15,000 to buy and own that car. Additional costs will include finance charges, car insurance, maintenance, repair, fuel, and any loss of productivity due to waiting for repairs," explains Norton. Another model may have had a lower TCO, if for example, it didn't break down as often or used less fuel to operate.
Educating Customers About TCO
The average cost to a company of owning one desktop computer is $9,000 a year, according to Norton. That figure includes software upgrades, maintenance and loss of employee productivity from downtime due to repairs. Multiply that figure by 100, the number of computers used in an average, small-sized company, and the TCO of desktop computers alone is $900,000.
How does Norton use the TCO concept when dealing with customers? Since he deals mainly with CIOs, CEOs and CFOs, the subject of TCO is discussed early on. "These people are responsible for their company's bottom line," says Norton. Before making an investment in computers, for example, decision makers want to know all the costs involved. Norton also holds seminars on TCO at various sites, including trade shows and customer locations. His target audience is the decision makers from the companies he currently works with, as well potential clients.
TCO Helps Make The Sale
Norton explains how applying the TCO concept to one customer helped make the sale. The customer, a multinational financial firm, had dedicated computers in each of its sites. "Employees used these computers to make changes to their company benefits. These changes included marital status, 401(k) deductions, new address, etc.," explains Norton. These dedicated computers were connected to the company's mainframe computer at its headquarters.
"The system was very expensive to maintain," says Norton. An alternative solution was to make the benefits software available to all employees from their desktop computers. The TCO of the dedicated computers in each office was eliminated, says Norton. The result was a less expensive, more secure solution.
TCO Sometimes Results In No Sale
Applying TCO sometimes results in customers choosing not to adopt a new solution, says Norton. This was the case with another one of Norton's customers, a 125-partner law firm with offices in Boston and Washington, D.C.
"Each partner had a notebook computer for creating and storing "intellectual property," such as letters and legal briefs. The intellectual property is considered very valuable by the law firm," Norton explains. The firm wanted to centralize the storage of all the partners' intellectual property. Select proposed an alternative, networked solution that eliminated the notebook computers. It also would cut the firm's cost of computer ownership by two-thirds and centralize storage of intellectual property.
"Although it would have resulted in a cost savings, the partners decided not to go with the new system," says Norton. "The partners did not want to give up the freedom of using the notebook computers and managing their own intellectual property. For them, the TCO of their old system was worth it." Norton says this is not unusual. Sometimes, analyzing the TCO indicates no changes should be made. It is a means of measuring costs and helps in the decision-making process of whether or not to adopt new technology.
Building A Reputation On TCO
"One of our goals is to demonstrate to customers that we provide sophisticated networking solutions," says Norton. Explaining TCO builds customer confidence, he says. "Decision makers who understand TCO will know immediately if you are trying to snow them," he explains.
Explaining TCO to customers has helped Select gain a very good reputation in the industry. Norton says his customers benefit from knowing the TCO of a proposed solution. "An informed consumer is a better consumer. You don't know if you are making the best choice until you've measured all the costs associated with buying and owning technology," says Norton.