Cost calculation those days is a mandatory skill for Sysadmins, as no IT project comes without cost. Here I will try to briefly explain what are main cost composition factors as well as less obvious ones. This should help you to discuss your next IT project with your shareholders and/or CFO using their language.

CapEx

CapEx is one-time expence to get your project up and running. What kind of expenses should be included into CapEx calculation:

  1. Purchase cost - say you need to buy a server - invoice total is going here
  2. Cost of additional supporting equipment
  3. Setup costs - depending on your situation, those can include:
    • Labor
    • DataCenter setup fees
  4. Licenses (OS, Software)
  5. Delivery/Shipment
  6. Training (if applicable)

OpEx

OpEx is regular expence you have to make periodically to keep your project running. Those include:

  1. Support contracts (hardware or software)
  2. Utility
  3. Labor (Maintenance)

TCO

Total Cost of Ownership is the one which helps your financial people to put your project into perspecitve of few years as it combines both CapEx and OpEx. In it’s simple form, TCO for period of X years is equal to TCO(X) = CapEx + OpEx*X. Ideally, TCO should also reflect replacement costs - in our example of new server purchase, we have to replace it at some point due to weared out hardware. So the question here is how to properly pick period (X) for TCO calculation.

From my experience, it seems that 6 years are well-round period for TCO calculation and here’s why:

  1. Most support contracts are available at terms of 2 or 3 years
  2. Average technology life-cycle is 6 years. Read more: Why should I throw away my old server?
Challenges

Unfortunately, it’s hard to precisely perdict TCO due to such factors that could impact OpEx:

  1. Inflation
  2. Labor costs are changing
  3. Utility costs are changing
  4. Support contracts cost are changing

ROI

Return On Investment - the one much favored by vendors and fueled by assumptions. Still, ROI remains one of key financial metrics for new IT projects. This metrics is focused on, per period, rate of return on funds invested. As marketed by the vendors, this metric indicates when savings or gains from implementing solution will outweight total spend over period (or how soon solution will pay for itself). Therefore, ROI is tightly coupled with TCO. As we already know how TCO is composed, most challenging part here is to estimate savings or gains over period. Factors, contributing to those are:

  1. Reduced labor
  2. Reduced material
  3. Improved quality (less returns => reduced labor+material)
  4. New revenew streams/opportunities
  5. Additional capabilities (f.e. more features)

For example, let’s say you spend $1000 annually on some activity. There’s solution on a market, capable to automate this 100%. Let’s say we want to estimate ROI in a perspecitve of 2 years. Basic formula for doing this would be: ROI(2) = Savings(2) / TCO(2) * 100%. Our savings for this period will be equal $2000 (2 years * $1000). Let’s assume TCO(2) for this solution is $1000. So our ROI for 2 years will be equal to 200%, meaning you will return $2 per $1 invested.

Further reading

NPV - Net Present Value - investment analysis technique taking into account current value of a future income (considering value discounting due to inflation etc.)