Product Champion:
Government Seat Management and Total Cost of Ownership

Because of the mandate that requires measurable improvements in efficiency and effectiveness of government IT operations, government agencies are evaluating the seat management solution offered primarily by the U.S. government General Services Administration and the Outsourcing Desktop Initiative for NASA. The government seat management alternative encompasses the management, operation, support and maintenance of a distributed computing environment by an industry partner (that is, service provider) whose performance is based on predetermined and agreed-on service levels.

Establishing total cost of ownership (TCO) is an essential component of the seat management initiative, which leads to some interesting comparisons with the private sector. From 1998 to 2000, the public and private sectors have been diametrically opposed in overall TCO per user (see Figure 1). During this period, public sector TCO increased, and private sector TCO decreased. However, in 2001, public and private sector TCO numbers trended downward, with each driven by different factors. For the public sector, direct costs increased, and indirect costs decreased. For the private sector, direct and indirect costs decreased (see Figure 2).





In addition, Figure 2 illustrates that the private sector direct costs per user have experienced only minor changes, and indirect costs per user have fluctuated. For the public sector, direct and indirect costs have varied greatly. Beginning with a large decrease in 2000, both costs are declining. The downswing in costs can be attributed to investment in technology and support, which greatly reduced indirect costs and improved support.

According to the Gartner distributed computing TCO chart of accounts, per-user direct TCO costs for the public sector declined until 1999 (see Figure 3 - the middle three plots). However, indirect TCO costs peaked in 1999 and subsequently declined. During the past two years, two of the three direct cost areas of the Gartner distributed computing chart of accounts show an upward trend. The hardware/software category represents new technology and software costs, operations that account for the technical/labor component. It is important to note that an investment in the direct cost area of the TCO chart of accounts drove a dramatic decrease in indirect costs.



Whereas measuring distributed computing traditionally has been quite difficult, the TCO methodology facilitates and standardizes the assessment of cost and performance of distributed environments. In addition, it enables enterprises to understand their performance from a best practices and an end-user perspective, the latter providing valuable insights into perceptions of services. Furthermore, it considers the complexity of an enterprise in the areas of hardware technology, software technology and the end-user organization. Having established its true TCO, an enterprise can use it as a measurement tool for planning future initiatives.

When determining TCO, ascertaining the obvious, tangible, direct costs (e.g., acquisition costs, hardware inventory and software inventory) is relatively easy. However, the intangible, indirect, "hidden" costs (e.g., infrastructure, support services, applications, network considerations and future directions) are more difficult to capture. It is essential that the TCO methodology embraces a holistic view of an IT environment, including all elements that affect the IT environment whether obvious or subtle. The TCO methodology facilitates the identification of requirements as well as aids in planning initiatives and managing an IT environment. Although historically it has been important to track tangible assets, the emphasis now is also on tracking resources. Such monitoring is almost impossible without appropriate tools and processes.

Despite a managed services agreement, it is important to remember that not all costs are absorbed by the service provider. Gartner research has indicated that 7 percent to 10 percent of total costs are retained by the service recipient in any outsourced service arrangement, regardless of its type.

Although TCO is not meant to replace traditional decision drivers and accounting methodologies, it is a vehicle that can assist in managing the IT environment. Gartner predicts that by 2005, 70 percent of global enterprises will use effective measurement methodologies to understand their IT environments.

Based on many years of research and practical applications, the TCO methodology has built a comprehensive set of usable data points. The data points are area-specific and exist for all current software and service products. These metrics focus not only on costs but extend into performance, end-user satisfaction and proven best practices. TCO is widely accepted as the de facto industry standard and uses generally accepted accounting principles.

To make informed decisions regarding alternative IT solutions, understanding the important steps in the decision-making process regarding a managed services environment is imperative. To examine the current state:
  • Determine the components of the environment including infrastructure, complexity and best practices
  • Assess performance and performance goals
  • Calculate the cost of services
The next steps include:
  • Exploring alternatives including other sourcing options, a combination of options or improving the current environment
  • Selecting the best scenario for the environment (that is, the target) and evaluating the different means to reach the goal
  • Implementing the solution
  • Analyzing whether or not the solution is working or requires refining
Following a sophisticated TCO methodology enables enterprises to uncover all the costs that are contributing to managed services TCO including subtle, hidden costs. To demystify the complexities of an IT environment, it is critical to employ a TCO methodology that ascertains true TCO and provides a springboard for decision making.

Source: David Bank, Gartner Measurement, david.bank@gartner.com
Writer: Carolyn LeVasseur, Gartner Measurement

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