Sunday, August 1, 2010

Data Center TCO - why no IRR?

by David Gross

In our first post on TCO Models a few weeks ago, I mentioned how these things rarely account for the time value of money, and how this can create dramatic distortions in the actual costs of the products the models are supposed to support.

I've looked through a few more models lately, and have yet to see an IRR, or Internal Rate of Return. In one otherwise informative model on data center TCO, the author decided to sum capex and opex together into one big TCO number. When I worked in capital budgeting, we would have tossed any project authorization request out the window if it did this, and most marketing people knew this.

The most important financial metric to anyone planning capital for equipment is not TCO or ROI, but IRR. Yet it's always missing! It's no wonder so many TCO models do little to improve market share for products that supposedly have the competition beat on cost. The first step to changing this is for vendors to stop beating their chests about incredible savings, and to incorporate IRR and the time value of money into their analysis.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.