Total Cost of Ownership
- By Stephanie O'Brien
- June 1st, 2011
Meeting expectations and achieving today’s business goals is not for the timid. The past two decades have been remarkable, to say the least. We have watched our economy swing from a robust and seemingly impenetrable “Dot-Com” boom to the deepest recession since the 1930s; organizations whose sole focus is the environment and its impact on mankind and our planet are thriving when they were practically unimaginable 20 years ago; and the new “business as usual” is “virtual gone viral.” It’s natural to assume the changing economic and social landscape would significantly affect the facility decision-making process, yet many decisions are still made in a vacuum — as they were 20 years ago.
Organizations have shifted into hyper-reactive, lesser-of-evils mode to survive using the same methods of “yesterday” in order to fulfill higher demands of today. Such is the impetus for the now familiar term: Total Cost of Ownership (TCO). No brainer, right? That depends. First let me extend kudos to all who have implemented the concept into practice — how’s that working for you? Those who already subscribe to this philosophy know that application of TCO to purchasing decisions may save millions of dollars over time, but does your current formula truly support that? This article is intended to address common and varying degrees of interpretation and application, and help your organization realize TCO’s full value potential. If you are serious about it, read on.
In the area of non-construction items, such as fixtures, furniture, and equipment (FF&E), publicly funded colleges, universities, and agencies often struggle with inadequate funding to replace completely obsolete items.
The earmark on an average community college project for FF&E products and related services ranges from six to 12 percent of construction costs. Add to that the many contingencies of the FF&E selection process, including disparate requirements, unknown ramifications, and obscure cost implications, and your budget formula is instantly obsolete. Often it is not clear what the true cost of owning and managing items can and will be. This uncertainty leaves the organization in an extremely difficult position as stewards of the taxpayer investment.
Declining operational budgets and increased public scrutiny make every decision that much more important. Space is a precious commodity in our own backyards, yet warehouses are commonly overrun with outdated, misfit, or less-than-desirable FF&E items. If we consider the root cause for much of it being here, we will likely find it in how the decision to purchase was made. Even with a conceptual understanding of Return on Investment (ROI) and TCO, many institutions engage at best a limited FF&E decision-making structure for their stakeholders, thereby perpetuating the costly result. So where is the disconnect between the TCO approach and transformation of this reality?
When making decisions about any purchase, it is common to focus on “upfront cost” (the initial expenditure to obtain and place into service any item) and ease of ordering. We tend to consider this amount as finite in our best-value comparison, but more often than not this proves to be shortsighted. Basing purchasing decisions on initial purchase price, lead-time, vendor familiarity, aesthetics, and/or purchasing ease is typical, and the path of least resistance. Even easier is deferring the decision making to an external group, such as the building’s designer — an entity motivated by hugely different factors when making its recommendations.
Although each of these factors has varying levels of importance, they neglect major areas of organizational expense and operational impact. Unfortunately, those costs that are not immediately obvious are sometimes obfuscated by the urgency of the project, or by a lack of understanding of their overall impact to the true bottom line. In addition, individual needs for items (such as furniture) are often specialized within education, resulting in a loosely structured, more or less open choice program for the user. This approach risks increased costs for the institution if and when the item selected does not perform as required over its lifetime.
Determining True Cost of Ownership
Defining “true” cost of ownership requires an understanding of all costs expended over the life of an item, both hard and soft.
Let’s begin with some history. Originally, a staff or faculty desk was a very straightforward decision — 30-in. by 60-in. in either metal or wood, with storage on both ends, and a modesty panel in front. Designed to support writing, the surface stood at 29 in. or 30 in. above the floor, fitting a 5-ft, 8-in. person perfectly. These dimensions had been in place for more than 100 years, well before technology became commonplace in the office environment or the science of ergonomics became well known. Thirty years ago, a decision on a desk was simple — there were not many options and its function was one-dimensional. The process would go something like this:
Pick color and size of desk > price and buy cheapest desk > place desk against wall > plug in phone > spend eight hours/day at same desk.
Today, our thought process has evolved to consider more litigious and complex aspects such as risk management, productivity, worker’s compensation, technology, and sustainability. So how do those aspects pertain to the calculation of true costs? Take a deep breath and prepare to think beyond your desk. The answers lie in these questions:
- What potential impact will the product selection have on faculty effectiveness?
- What about student productivity, learning outcomes, pride, and retention?
- What about the declining staff of the M&O team and their workload?
- How about the IT department’s interface and workload?
- Employee morale?
- Your administration’s challenges with community perception regarding the expenditures of public funds?
- And how about the institution’s general credibility and image?
Let’s examine a few scenarios to better understand how typical FF&E items are relevant to specific stakeholders and how absence of comprehensive analysis might translate to additional costs (represented by $ in the following examples).
1. Faculty Desk:
Faculty members are often at their desks for about an hour or two at a time, lessening the user’s vulnerability to injury. But as a principal component of a faculty member’s work, desk functionality is crucial. Let’s assume that College X has decided upon a fixed-height desk for faculty offices. If faculty members are significantly shorter or taller than 5-ft, 8-in., they would need to make physical accommodations in order to use the standard-issue desk, often to the detriment of their work performance ($).
Potentially, the campus facilities staff may be called upon to raise a desk on blocks to help a taller user get comfortable, adding an expensive service to the initial purchase price ($). Or, to accommodate a shorter person, the college may be required to order a special-height desk, which may not be part of the original order and purchased at a higher cost than the other desks as a result ($). And don’t forget the soft costs of the purchasing department’s time ($), as well as downtime and disruption to the faculty in the process ($).
Now let’s consider the involvement of the IT team. If the desk is designed with a modesty panel that happens to be up against a wall, both the faculty member and an IT person may need to take extra time to create access to the wall outlets and/or data ports ($). This increases the time that the IT staff needs to perform their tasks, and hinders their ability to address other institutional needs ($). That’s seven opportunities for additional expense beyond the initial purchase!
2. Staff Desk Chair:
Campus staff are extremely vulnerable to workplace-related injuries, given the great amount of time they spend sitting at a desk. Many organizations allow staff to purchase items like desk chairs utilizing a “Pro Card” system. This often circumvents oversight and increases the possibility that decisions are made based upon some marketing pitch or emotional hook. A desk chair may range in cost from $49 to $1,500 — but what matters most in the selection? Typically, the price being paid does not include any services, such as receiving, assembling, and delivering the product to the user ($). For the chair itself, if the right variables are not taken into consideration, hidden costs could include workers’ compensation claims ($), or sooner-than-expected replacement costs when the item fails to perform ($). Other less obvious but just as implicating are declining productivity ($), increased frustration with work environment ($), and a potential for increased mistakes ($).
More importantly, since a chair is one of the most personal tools that a worker utilizes each day (it must fit each specific body, not just any body), there is potential for a product not adequately accommodating another worker in the future. This increases the costs through replacement ($), staff time for removing the item (if necessary) and procurement ($), and possibly even storage ($). There are nine opportunities for additional expense for this category of purchase!
A common item within a higher education environment, but also very specialized. When preparing a specification for such an item, faculty and lab staff are involved in determining the aspect ratio, magnification, and other relevant technical details. From a procurement perspective, the approach is often “Model 123, Brand X, or ‘Equal,’” which can result in a product purchase that does not meet the program’s technical requirements. More importantly, what might be missed in the process are the hidden costs of retraining lab staff to operate a new microscope ($), the lost instruction time that a faculty member might experience when trying to learn the new product’s capabilities ($), the loss of effective servicing agreements ($), and so on.
If the microscope is a digital unit, there might also be a compatibility situation between the hardware and that which is required to project images, if the IT team is not proactively consulted ($). Four more opportunities for increased (and unanticipated) costs to the institution.
A New Awareness of Hidden Costs
You get the picture — as straightforward as these items are perceived, they carry a more profound impact on the ownership aspects than many programs realize. The overarching ideal relative to FF&E is that it should have an average lifespan of more than 30 years for an institutional environment, and actually help reduce the total cost of ownership because it demands less involvement from M&O, IT, and the facilities staff. For FF&E in general, even occasional staff involvement with individual items can add hours of hidden expense to the initial purchase price of a product. Identifying and qualifying the hidden costs might appear quite overwhelming, especially when funding for product purchases is often distinguished separately from post installation, long-term operational, and maintenance expenses.
Concurrently, we are increasingly reminded that investors to our facilities (taxpayers, community supporters, etc.) are getting savvier in their approaches for making prudent financial and environmental decisions. In today’s economic context, obtaining and investing your taxpayer dollars wisely involves systemic awareness, forward thinking, and dedicated execution. Your image, environment, and community are intrinsic beneficiaries of this approach.
Green Vs. Green
And finally, weighing the “green” against the “green”…
The debate over environment vs. cost, vis-à-vis longevity, is alive and screaming. Does this have anything to do with TCO? Absolutely! Many purchasing policies that oblige us to consider product specification details related to VOC/off gassing, carbon footprints, and sustainably produced materials are already in place. While these aspects may translate to higher upfront cost, applying TCO principles to the qualification formula can actually increase your returns.
The central metric in this case is the rate of disposition. Waste reduction is indeed a focal point of environmental stewardship. If you evaluate the green aspects alongside the impact to M&O, IT, Risk Management, and Facilities, combined with the goal of 30-plus years of life, you will end up reducing your contributions to landfills, reusing these products (still in good condition) through repurposing, and recycling more of them by way of surplus sales. The environment benefits, the organization benefits, and the conscientious consumer benefits… how’s that for ROI?
Whether you choose to tackle this through internal development/self regulation, tap into your network for best practice ideas, or engage a consultant, understand that TCO is only as meaningful as you make it.
Stephanie O’Brien is president/CEO of Dovetail Decision Consultants, Inc., a champion of taxpayers’ investments in the field of fixtures, furniture and equipment coordination consulting and strategic planning for public higher educational facilities.