Measuring the True Cost of Technology: Beyond TCO, There’s TCR
Measuring the True Cost of Technology: Beyond TCO, There’s TCR
April 7, 2021
How much does it cost?
That’s an important question for any technology purchase decision. While the question may seem simple, the answer is more complex. That’s because there are a number of ways to evaluate cost. The more thorough your evaluation, the closer you can get to understanding the true cost. What’s more, when you move past looking at just price, value may shift from one vendor to another.
If you’re conducting due diligence for a major technology purchase – a digital banking platform, for example – it still makes sense to start with price. In technology buying, you’re likely to hear the term Total Contract Value, or TCV. This is the total amount a contract obligates your institution to pay over the life of the contract. In other words, it represents the price. And if you’ve been through this exercise, you know that prices can vary widely.
…nobody ever got fired for buying IBM.
At the other end of the spectrum, there are the large, well-established organizations that have a much higher overhead to support. As one might expect, these companies price their products at the higher end of the range. With that high price comes a certain measure of safety. There’s an old saying from the mainframe era that nobody ever got fired for buying IBM. That same line of thinking applies here. However, a high price does not necessarily equate to value.
Finally, there are other companies that fall somewhere in the middle. These companies often offer the best of both worlds. Their pricing is competitive, but they’re unbloated and agile enough to be truly responsive to your needs. They’re willing to listen and adapt.
Of course, the TCV doesn’t represent the only money you’ll spend on a technology purchase. These other hard-dollar expenses are captured by what’s called Total Cost of Ownership, or TCO. When you’re conducting your due diligence, it’s critical that you compare TCO among the various candidates, not just price. It’s typical to compare TCO on a five-year basis.
The 4 Components of TCO
There are four components to TCO: quality, service, delivery and price, collectively referred to as QSDP. All of your hard-dollar costs fall into one of these categories. For example, the new technology may require additional staffing. This is a cost of delivery and must be factored in.
It’s also important to look at the money your institution will spend with the vendor beyond the TCV. For example, it’s inevitable that you’ll want some custom work done some time during the life of the contract, resulting in one or more Statements of Work (SOWs). These all add to your bottom-line expense. And while you may not know the precise number of SOWs your institution will need, it’s essential to compare how different vendors price similar custom work. This can be considered a cost of quality. TCO is important and there are many online resources to help you measure it.
The problem with TCO is that it only measures and compares hard-dollar costs – not soft-dollar costs and other intangibles. That’s why at Tyfone, we’ve coined the term Total Cost of Relationship, or TCR. By championing the cause of TCR, we help our prospective customers perform the most complete analysis of all the potential costs of any given technology relationship.
For example, let’s consider the implementation of a new digital banking platform. Regardless of the bill your institution receives for implementation, a bumpy implementation from a user standpoint can cost your institution much more.
…it typically costs a financial institution at least $300 to acquire a new customer/member.
According to data analytics firm Blue Orange, even in the age of allegedly cost-effective digital marketing, it typically costs a financial institution at least $300 to acquire a new customer/member. What does that have to do with a digital banking implementation?
Let’s suppose for a moment that your users find the implementation inconvenient, so much so that 100 of them actually decide to find a new primary financial institution based on that experience. According to the data noted earlier, it will cost your institution at least $30,000 to replace those consumers.
What’s the cost of a lost opportunity?
Likewise, consider again the SOWs that you may want completed over the life of the contract. If the vendor charges too much for this work, you may elect to simply forego the project. That will save you money, right? Maybe. But what’s the cost of not providing a feature you know your users really want? Will existing users leave because one of your competitors offers that feature? Will new prospects pass on your institution entirely? In other words, what’s the cost of a lost opportunity?
This is where reference checks begin to become so important. The experiences of those who came before you are good predictors of what you can expect. It’s imperative, however, that you don’t settle for a few reference clients that were hand-picked by the provider. You know those institutions will give glowing references. Instead, insist on the provider’s complete customer list. Then call ones that are similar to yours in size or demographics. Then call a couple at random. Ask about the impact of their decision on the end user. Find out if they’re getting real value for the money they spend on SOWs. This is the only way you’ll get a true picture of the potential TCR.
Technical support is another area that should be thoroughly addressed during reference calls. Mediocre technical support is not only frustrating; it’s costly. The time your employees waste interacting with a provider’s technical support group is time they could and should be spending to better serve your consumers. And depending on the nature of the issue, consumers’ time may also be wasted.
What are the lines of communication between your institution and the technology provider? Are there formal communication protocols in place, from the technical level all the way up to the executive level? Does the technology provider actively seek input from financial institutions like yours – and then act on it?
The best way to ensure that your institution doesn’t outgrow a technology platform sooner rather than later – and thus require a costly replacement – is to make sure your institution has a voice in the growth and development of that product. Of course, no company can tailor its entire product to your specific wants and needs, but a company that listens is a company that cares.
The true TCR needs to be measured beyond the duration of that first contract.
At Tyfone, our goal is not simply to have your institution as a customer for a few years. We’re looking to forge relationships and partnerships that last for decades.
Think about that for a moment. Think about the costs, both hard and soft, of going through a conversion every few years because your current vendor can’t keep up. Then compare that to going through one conversion now that creates a relationship that’s still going strong when you retire.
Price is clearly an important consideration in any technology purchase decision. However, an evaluation of Total Cost of Ownership is even more important for obvious reasons. Beyond TCO, though, the true impact of any technology purchase decision can only be measured by looking at the Total Cost of Relationship. TCR matters most.