ROI: The Wingman of TCO
Creating ways to show the value of a partnership has occupied the minds – and meetings – of channel leaders for as long as the indirect-sales model has existed.
By Diana L. Mirakaj
While measures such as deferred costs and force multipliers are applied with mixed success, return on investment (ROI) and total cost of ownership (TCO) have remained consistent indicators to determine business performance.
In simplest terms, an ROI calculation quantifies the costs and expected benefits of a specific project or business endeavor over a specific time frame, ranging anywhere from two to five years. TCO, on the other hand, looks strictly at expenditures.
If used within a division of a large enterprise, TCO could be applied as a measure of efficiency for helping service-oriented departments like IT lower costs and elevate performance for business processes such as operations, tech support, disaster recovery, and change management.
Solution providers, too, should look closely at TCO to manage their businesses effectively. Vendors have a responsibility to show resellers the economic benefits of a strong partnership. TCO provides a realistic measure of the long-term costs required to productively manage day-to-day operations and processes more efficiently. This visibility allows for improved forecasting and growth planning, among other strategic initiatives.
Most people don’t think of measuring TCO as a business driver or an asset that can increase revenue, profit, or customer value. Since TCO looks only at one side of the equation, one would assume that ROI is the more valuable metric. Achieving ROI requires an accurate TCO calculation.
Business ownership brings purchase costs, of course, but it can also bring significant additional expenses for operating, implementing, maintaining, marketing, selling, and partnering around the same assets. All of these expenditures occur without the guarantee of a predefined ROI – only a forecast.
The business competencies of a solution provider are what enables it to drive higher levels of technology sales – whether products or services – on their own behalf, as well as the vendors they represent, and for the customers they serve. Their ability to bring expertise, efficiency, and innovation to market is a demonstrable way to represent the ROI they bring to a partnership.
For vendors, partners that calculate TCO and ROI, and do it accurately, are more valuable members of the channel community. So, too, are solution providers willing to invest in themselves for long-term growth. At The 2112 Group, we’ve found a correlation between partnership commitment levels, investment amounts, and performance among more mature, dedicated solution providers. That connection causes a ripple effect.
For example, persuading vendors to fund marketing programs using MDF, which are often justified based on performance, can free up money for product development or sales training aimed at opening new avenues of revenue creation. Funding goes to the top performers, and the top performers are typically those who have already invested in their businesses.
Neither TCO nor ROI accounts for every financial liability and benefit that may flow from a partnership. Therefore, both vendors and partners must constantly look at the capabilities they have – and where they can improve on their business relationship. The onus is not on one or the other to generate new opportunities; it’s a shared responsibility to evolve and expand market share that results in a better TCO and ROI outcome.
The 2112 Group specializes in services that support vendors and solution providers interested in improving their channel strategy and growth planning. 2112 Investor, available to all vendors in the United States, Canada, and Europe, calculates the total cost of partnership, the partner milestones to achieve ROI, and required investments to reach profitability. For more information about 2112 Investor and other 2112 services, please contact us at [email protected].