ROI – The 5 Value Drivers
ROI is a measure of potential financial value created relative to investment and risk. Technology has 5 Value Drivers, or ways it creates financial value: decreasing hard costs (capital expenditures), decreasing soft costs (operational expenses), increasing existing revenue streams, creating new revenue streams and reducing risk (decreasing the variability of outcomes).
5 Value Drivers
Burden of Proof
Creating New Revenue
Enhancing Existing Revenue
Soft Cost Reduction
Hard Cost Reduction
When the business cycle is at its bottom, as it is today, the burden of proof increases and the strategic value decreases. When times are good, as they will be again, the decreased cost of capital eases the burden of proof and increasing market opportunities enhance the strategic value of technology.
TCO – The Whole Cost Model
TCO is a model for assessing the direct and indirect costs of technology deployed in an operational context. TCO goes beyond ROI, which only includes direct costs (the investment), to include indirect cost. In assessing indirect costs, there are two traditional methods, Traditional Cost Accounting and Activity-Based Costing. Traditional Cost Accounting adds direct costs to indirect costs estimated by an overhead amount that is arbitrarily allocated according to a volume-based measure (e.g. employee hours deploying and using the technology). This top- down method assumes a relation between the overhead amount and the volume-based measure. Activity-Based Costing develops a bottom-up estimate of indirect costs based on specific categorized activities created by the technology. TCO is an Activity-Based Costing method to reveal a more accurate estimate of overhead.
However, direct and indirect costs are not the only costs that need to be considered when purchasing technology. The below Whole Cost Model reveals the difference between “total and whole”: