Archives For tco

I was recently proposing a training class for a large manufacturer.  My main point of contact wanted the training and had money approved for it. However, they required a certain multiplier as a return on investment(ROI).  Is this an ROI sale?  No, it’s a competitive advantage sale – training is almost always a competitive advantage sale.  The request for numbers is purely red-tape in this case and is submitted using the client’s ROI model.  The same could be said for TCO (Total Cost of Ownership) requests.  If the client already wants what you provide, and has access to money, but requires internal financial analysis, don’t think of this as a financial sale.   As you might predict, using the client’s model, we made my numbers work.  Can I prove there will be a certain return on training?  No, I have no control over what sales people will do with the material I give them.  However, bureaucrats upstairs require the paper, so we worked out the math and submitted it.  My value proposition remains, competitive advantage.  The question will always be, “Will the sale people be able to sell more after going through my training?”  If they apply it, they will – and the price of training is easily recovered when that happens.

© 2011, David Stelzl

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ROI vs. TCO

March 24, 2011 — Leave a comment

A question came in today asking, “What is the difference between ROI and TCO?  Our company uses the terms interchangeably.”

This is common…but they really are different.  Here is some explanation:

I use the term TCO specifically to mean that it will cost you less to produce the same or better results.  By focusing more on business results and less on cost, the seller has a chance to avoid a true ROI study; which may be analogous to asking the CFO to audit your proposal.  The last person I want to sell this to is a CFO (or anyone in the purchasing department).  Once the focus on business moves to finances, value is compared only to the cost of other options, and not on the value you bring to the business.

You might think of ROI as purely mathematical.  One way to describe it is:

ROI = (Financial Gain – Cost of the Investment)/ Cost of the Investment.

True ROI calculations involve a deal’s net present value ( taking into consideration  a proposal’s future estimated cash flow the cost of capital), payback period or hurdle rate, and an internal rate of return.  In other words, ROI at its core is a math problem dealing with investments, returns, and the cost of capital.  The average sales person’s ability to compute these numbers, or even review them with a financial officer is limited in most cases.

TCO might be defined as the cost of acquisition, installation, and operation.  In this case, we can take into consideration only the current solution and whatever solutions might be under consideration or in use at the present time.  Gartner Group often reports TCO numbers for various technologies,  taking into consideration the above as well as long term operations and future replacement or decommissioning of a technology solution.  When TCO is fairly evident, meaning one solution might involve many smaller servers or appliances that require data center real estate, cooling, and possibly additional staff, it makes sense to use this as justification to buy your solution.

I put this under operational efficiency because the cost savings generally are tied to an efficiency gained by the solution, and that is where the seller’s focus needs to stay.  To focus on the math is to kill the deal, unless the customer is already determined to buy, and is just price shopping at this point.

© 2011, David Stelzl

Thinking about TCO

March 23, 2011 — Leave a comment

Continuing on with operational  efficiency sales tactics from yesterday’s post, the problem comes in when the product or service does not directly relate to a business issue.  This is common with efficiency gains when considering products that relate more to infrastructure. However TCO numbers can play a strong supporting role here; where product doesn’t necessarily require a tight connection to a business function.  Virtualization and data center consolidation are good examples, where a true ROI might be hard to prove, but TCO may be apparent.  If you’re going down this road, make sure your numbers make sense.  Always best to get numbers from the client – at a level above those charged with system administration.

© 2011, David Stelzl

Photo taken By Hannah Stelzl

I’m just returning from the snowy North Woods in Michigan after spending ten days with 50 homeschooling fathers.  What an amazing trip this was!  While there I posted several articles on selling using return on investment and competitive advantage.  Of course I scheduled these posts ahead knowing I would be without cell and and Internet coverage.

A natural third approach to selling is  demonstrating operational efficiency; this one I consider to be profitable and a strong motivator for clients when considering new technology.  The key here is in the second word Efficiency.  When sales people talk about operational efficiency or the related topic of Total Cost of Ownership (TCO), they often have no idea what they mean.  They are parroting empty words created by marketing, without the vertical knowledge to actually help clients achieve this goal.  So it sounds good, but in the end it’s just another sales pitch.

Instead, if you are going to head down this path, become an efficiency expert.  I often recall in sales training classes the story of Cheaper by the Dozen.  In the original movie, the father is known around the world for his time in motion studies.   People are calling on him from across the ocean and willing to pay for his presence in England, which at that time meant traveling by boat to cross the Atlantic, with a month’s worth of travel expenses, just to present at an upcoming conference.  The fees here are justified by great wisdom he brings to the manufacturing process.  This kind of wisdom is worth paying for and is certain to put you ahead of your competition.  Stop parroting another’s value proposition and gather some wisdom if you plan to sell TCO or operational improvements.

© 2011, David Stelzl

Several companies ago, one of my employees, our security practice manager, made the comment, “Eventually everyone realizes that security is the place to focus.”  He is right, just about everything hings on security when it comes to technology.  You can have all kinds of ROI, operational efficiency gains, etc. But if it’s not secure, it doesn’t really offer any benefit to the corporation.  Here is Marc Benioff, CEO of Salesforce.com reminding us that, security is a core part of the value proposition regardless of what technology you are selling.

© 2010, David Stelzl