Life Cycle Management is a proactive philosophy where you spend a nickel today to save a quarter in subsequent years. [Do not read any further if you have no interest in investing for the future and are in a survival mode.]
This proactive philosophy is important to budgeting for your company and forecasting expenditures. It helps you distribute the expenses that you will eventually incur regardless of when you spend your dollars. You are probably in a position where you cannot choose to have a computer or not for your employees, so if you have 50 employees, then you need 50 computers. So it is not a question of if they get a new computer, but when that computer gets replaced.
You do not need an IT firm to help you with life cycle management either, and you can use this philosophy for other things like construction equipment and vehicles. (It’s an accounting principle actually.) A good IT firm will help you determine your life cycle for each machine and identify patterns, so you are replacing equipment before it becomes inefficient or dies. Great IT firms do more than fix what is broken; they advise and partner with you to help your company perform better and to avoid unexpected, preventable expenses.
Determining Your Equipment’s Life Cycle
You must ask yourself, how long will I need this piece of equipment (personal computers, servers, firewalls, etc.) and how long will this serve me well. The key to determining an accurate life cycle hinges on the latter answer. You need your equipment to serve you well because slowing down your employees’ productivity just 5% each year costs you around 100 hours annually. Alternatively, having an employee stop for 30 minutes to fix an issue every week adds up to 125 hours over a year. Now multiply that inefficiency times all of your employees! The goal of life cycle management is to achieve the maximum ROI (Return On Investment). To do that, you must keep your team efficient and productive. This is where the proactive philosophy of life cycle management shines.
The old saying is, “If it ain’t broke, don’t fix it.” That is not the case when thinking about your team’s performance because saving $500 on a new switch may cost you $25,000 in lost performance. You can save money not replacing your 1915 Model T, but newer vehicles today are more reliable, efficient, faster, and predictable. Plus, you’ll pay an arm and a leg for parts to maintain that Model T and good luck finding a reliable, fast mechanic to support it. IT works like that too, except technology becomes obsolete and inefficient much quicker.
Determining Your Life Cycle Schedule
Once you determine the life cycle that most of your equipment will follow, you want to determine how many devices you need and the cost to replace all of them. Divide that total cost by the yearly life cycle and that gives you an average yearly spend.
For example, we usually suggest computers, servers, switches, and firewalls have a life cycle of 5 years for normal usage because most manufacturers only warranty and support the hardware that long. Plus, in most cases, you can only depreciate hardware on your books for five years.
For example, if you have 50 computers, 3 servers, 2 switches, and 2 firewalls, then we may suggest the following life cycle schedule:
|Year 1||15 computers, 1 switch||$23,000|
|Year 2||7 computers, 1 server, 1 firewall||$26,500|
|Year 3||6 computers, 1 server||$24,000|
|Year 4||18 computers, 1 switch||$27,500|
|Year 5||4 computers, 1 server, 1 firewall||$23,000|
With the example above, the annual cost is not the same each year, but it still comes close to an average of $24,800. A fallacy of life cycle management is that you will have the same expenditures every year. You want to look at your total expense over the life cycle (such as five years) and plan accordingly instead of budgeting for equipment reactively year to year.
Also, not having a uniform expenditure is ideal for you too because it provides a two-year investment strategy for tax advantages. If you are having a great year, you may make a larger investment this year that pays immediate dividends next year because your employees are more productive and produce a larger profit. On the reverse side, if you have an off year, you can reduce your burden that year and still benefit from the investment you made the prior years.
If you do not practice life cycle management, you could end up spending the entire $124,000 in the above example all at once, at a time you least want to spend it. Many companies struggle because they become reactive and then cannot reinvest in new equipment because they do not have the capital to do it, even though that investment may pay for itself in months.
[Note – Some companies, in particular in the banking industry, intentionally do bulk upgrades of their entire technology infrastructure every 3-5 years. They successfully do this because they “pre-fund” that investment, so they are not surprised when the $124,000 invoice appears. Also, they are still using lifecycle management, just on a broader scale than just looking at the IT budget.]
Biggest Mistakes in Life Cycle Management
The biggest mistake a company can make with life cycle management is abandoning a 5-year life cycle in years 6 and 7. Some executives may get distracted by the short term savings and decide not to reinvest for the future (meaning they stop purchasing any new equipment). All that does is stack the cards against you. You are basically “rolling the dice” with your budget and eventually your computers, servers, and other equipment will fail. It will actually cost you more money because you will have employees out of work for a period of time, have to pay rush shipping and overtime for your IT team, and purchase equipment in stock versus what you need. Plus, you will not have that money readily available because you did not budget for it.
You’ve already gone through the hard part, which is the first 2-3 years. After that point, you should already begin to see ROI from your investment and the key is just to keep on the path.
In business, especially with technology, you never want to remain stagnant. It costs you more when you “punt” expenses to the future and it forces you to become reactive with your money. A reactive philosophy is costly, and atrophy is never your friend because more problems arise, productivity drops, and those small issues become huge problems when left unaddressed; all because you got cheap and pushed your equipment too long.
Another issue many companies do not consider when they skip updating their hardware is software compatibility and repercussions in supporting their network. Eventually, you will not be able to upgrade the operating systems and software applications on your servers because you did not upgrade that server, and you are now no longer compliant with vendor specifications. This not only costs you productivity, but the manufacturer may not support your older operating systems and software. They give you their “best effort” because it is cost prohibitive for them to train their support teams in older systems. This also causes a ripple effect where you cannot replace your backups or other equipment because of the old operating system. You create a ticking bomb, and you have no idea when it will eventually blow. Sometimes this bomb can only be diffused by one person, or you have to staff a technician that can continually band-aid an ancient system like Fortran.
The second biggest mistake is not considering the conditions you use your equipment. If you are a manufacturer running 24/7, then your computers will probably not last a full five years because of the aggressive wear and tear on the machines. For example, here in New Orleans, tires never last their full life span because the roads are extremely bumpy and riddled with potholes. You cannot compare your environment to one with smooth roads and expect the same results.
Another big mistake is just being cheap and not replacing things like $5 cables and other components attached to your network. I have seen $25,000 servers go out because the cable connecting it to the internet went out because it was not replaced in 15 years.
Don’t forget to stay current with your software, support/warranties, and subscriptions because falling behind may mean you do not get the timely support you expect, causing your production to halt and slowly your recovery.
Soft Cost Savings of Life Cycle Management
(Especially for High Growth Companies)
We have discussed productivity, efficiency, and even tax deductions of having a life cycle management plan. Current technology can also be a differentiator to recruit employees, especially Millennials who are highly critical of a company’s technology. A company that invests wisely in their technology reflects a concern for employees and shows smart management practices in play. When a job applicant sees “ancient” computers, they see the inefficiencies and assume the company is either struggling, or the owners are taking too large of a cut.
For high growth companies, usually their sales and demand for production outpace their ability to hire. Basically, they always need more bodies, so their IT infrastructure must be rock solid to make up that gap in production and inefficiencies affect them two to three times more than stable companies. Technology becomes a tool the companies can leverage for recruitment and retention.
Closing Thoughts on Life Cycle Management
In the end, you will spend X dollars over X years and you want to get the best bang for your buck. Don’t think about your investment in isolated years because being more intelligent with your expenditures allows you to do more with less – it is magic. With proper life cycle management, you can forecast expenses, run optimally, retain and recruit amazing and productive employees, which will make you say, “Life is good.”