Life-cycle management explained
It’s a fine line, determining when to junk old IT equipment. How to know when to pull the plug? You could invest in a crystal ball, or you could get serious about hardware life-cycle management
There are many different approaches to managing the hardware life cycle, based on factors such as a company’s size, the number and locations of offices, and financial priorities, but experts say the most important thing about a life-cycle plan is to have one.
“Companies that are proactive in making [hardware life-cycle] considerations will derive a lot more value from their decisions than those that are reactively planning,”
If a company decides, for example, that the desktop PCs it’s in the process of purchasing will last for four years, it can budget for acquiring new systems after that period has ended. And by specifying a point in time when the systems should run out of useful life, the company can also plan to evaluate those systems prior to that cut-off date, analyse what condition the PCs are in and opt to extend the useful life for financial reasons if need be, Houghton says.
Planning “should happen when you’re buying the equipment,” Houghton says. “Make decisions based on the value of the hardware at the end of the equipment’s life, warranty provisions, user needs and capital resources of the company.”
Opex vs Capex: Maintaining the right balance
The changing signals
Over the last few years, a shift has taken place with respect to CIOs’ outlook to opex vs capex debate. Large enterprises today prefer opex to capex for long-term projects. The reason is understandable. The in-house software development projects, such as ERP, involve high sunk costs. In today’s times, investing big money in a long-term project that doesn’t assure quick returns can be risky. Moreover, given the increased maturity and reliability of branded tools, opex model can be a wiser option in such cases. Lastly, getting approvals for large capital expenditures is a challenge faced by CIOs, especially in the government departments and the PSUs. Even that attaches a greater value to opex than capex.
Whenever troubled with the opex vs capex debate, follow a thumb rule: Is it a core business investment or is it meant for some non-core function? While investing in any new asset for the company, if you can add value, optimize it, distribute costs over multiple businesses and locations, control it from centralized location, then capex is the sensible choice. Once such investment is made, we can leverage it for many years as its associated costs diminish.
On the other hand, if the particular asset or service is long-term in nature, and you cannot add value to it by managing it within your organization, then going for opex model may be a better option. The simple formula can be: growth in business should be directly proportional to the growth in operating expenses (opex). At KRCL, assets and services like hardware and maintenance, where we don’t have expertise and have to depend on OEMs anyway, become ideal candidates for opex.
Total Cost of Ownership (TCO) is a commonly used calculation designed to help businesses assess the direct and indirect costs
Total Cost of Ownership (TCO) is a commonly used calculation designed to help businesses assess the direct and indirect costs associated with information technology purchases. By doing a TCO analysis, you can make more informed purchase decisions.
When evaluating the TCO of hardware, software, or networking equipment, you should consider:
- The initial costs of the hardware and software.
- Costs for the initial deployment and employee training.
- On-going maintenance fees for software updates and upgrades as well as help-desk support.
- Expenses related to system and network maintenance, backup and other data protection services.
- Costs associated with downtime.
We know of no organization that records all employee activities by task, information you would need to answer questions like these:
- What support costs did you incur last month?
- How much time did each user spend solving computer-related problems?
- How much work was lost due to downtime on desktop PCs?
Additionally, organizations rarely have accurate inventory and asset information regarding their computing systems, especially in large, distributed computing environments where PC, server, and LAN purchasing decisions are often handled locally.
So what’s the value of knowing a system’s TCO? Obviously, our objective is not to calculate exact figures. Rather, you need to understand what these costs could reasonably be in your organization. You must plan for these costs, even if you can only roughly estimate them. The TCO also provides a good basis of comparison between alternative system deployment strategies, between platforms, and between competing products.
Government Caps Depreciation rates to raise companies tax liability
Many companies could see their tax liability going up and cash flows getting affected, as the government has capped the rate of deduction under accelerated depreciation. While manufacturing companies would obviously be hit, firms that depend heavily on technology could also see substantial impact.
The government has set the rate for depreciation at 40% a year. Until now, many companies were depreciating assets at around 60%, said industry trackers. While the government’s move is part of its efforts to reduce taxation loss in areas where sops were provided earlier, the step has led many companies to redo taxation planning
High Initial cost of acquiring the equipment
Low initial cost of acquisition
Cost of capital >= 6% PA invested in buying equipment
Cost of lease is negligible <= 5% for 3 years
Consolidated Purchases could result in idle time
Avoid idle time, lease as & when needed
Lease charges as expenses
Improves Book value of the company
Not considered a tangible asset on books
Need for a fresh budget for capex for refresh
Cash less Tech refresh
High Cost of Asset Management & tracking
Leasing company manages & tracks the asset