New network acronyms for 2003

As another year dawns and the economy shows no signs of a rapid recovery, savvy technology architects need to add a few more acronyms to their lexicon: TCO, ROI, EBITDA, NPV and IRR.

These acronyms were previously the linguistic realm of the corporate finance department. But the current business economy is dictating that they become familiar to anyone whose work can affect the financial state of a company. And technology investments – especially investments in network technology – can have a definite financial impact.

Anyone involved with planning, obtaining or implementing corporate technologies in the coming year needs to ensure that the proposed solutions are based on sound business principles. As I have said before, technology architects need to focus more on profit and loss than bells and whistles. Technology solutions have to meet business and functional requirements, but they need to be fiscally responsible. Gigabit Ethernet to the desktop might be a cool technology to recommend for new branch offices, but unless your users are pushing 100M bit/sec on a regular basis, Fast Ethernet will probably get the job done more economically. And while the technical staff might want to use internal resources to design, implement and manage a corporatewide, multimedia network infrastructure, fiscal research might reveal that it is more cost-effective to use a vendor-provided managed service.

Each company has its own method of evaluating financial decisions. Some use a basic, total cost of ownership (TCO) model, in which you map out the overall cost in hardware, depreciation, maintenance, support and manpower that a technology would incur over a certain time (normally three or five years). Some use a simplistic overall-cost model, while others also might want a return on investment (ROI) analysis to see potential cost avoidance, cost savings or revenue increases.

Other companies might require a more rigorous analysis. If a company is focused on earnings, management may want to see how an investment will affect earnings before interest, taxes, depreciation and amortization (EBITDA). This might involve more complex net present value (NPV) and internal rate of return (IRR) calculations that require a cash-flow analysis over a certain time period.

In many cases, architects will need to partner with the finance department to understand these models and obtain help with their analysis. Often the finance department will have spreadsheet templates that automatically perform the necessary calculations.

However, even if this assistance is readily available, technology architects still need to understand the models their companies use, as well as key financial concepts. By aligning technology research with a company’s financial goals, architects can avoid wasting time researching technologies that are too costly and focus on solutions that will bring overall value to the company.