Silicon tally: the fact that hardware and software prices are so much lower than they were 10 years ago has actually made it harder for firms to keep tabs on their IT costs. Stephen Moriarty explains why. (Technology).

Over the past decade or so the cost of buying hardware and software has dropped dramatically. Computers that used to require an outlay of tens of thousands of pounds can now be bought for a fraction of that cost. Software that had to be separately bought and paid for now comes bundled in with the hardware. And a whole new range of equipment--handheld computers, personal digital assistants and mobile phones--is now available at a unit cost of a few hundred pounds at most.

This should be good news for businesses in these cash-strapped times. Reductions in IT purchasing costs mean a lower initial outlay, or at least the option of buying more technology for the same money. Assuming that technology leads to efficiency and further savings, surely that is a positive development.

But this view fails to account for the fact that the cost of IT continues throughout its life cycle. An accurate accounting of IT must therefore allow for its total cost of ownership. Some of the items that must be included in this calculation are maintenance charges, software licensing fees, repairs, upgrades and insurance. The costs of training, consultancy and support must also be added. These outgoings are usually major, but in most firms they are totally unmanaged.

The financial consequences of this situation are serious. According to research by Gartner, an unmanaged PC has an average annual cost of ownership of about five times its purchase cost. KPMG has calculated that British businesses could be losing up to 17 billion [pounds sterling] a year by managing their IT assets ineffectively.

In the current economic climate, IT cost control should be a priority for financial managers, but in many organisations it's an extremely hard task. One of the reasons for the difficulty is, paradoxically, the low cost of the equipment. As the cost of hardware and software has dropped, many IT-related purchases now fall below the company's capitalisation threshold. They are therefore written off against profit rather than recorded as assets and depreciated. As a consequence, the expenditure does not appear on the balance sheet. Although each purchase is relatively small, the total value of these off balance sheet items maybe considerable.

Another factor that makes it hard to control costs is that there's often no clear delineation of responsibility for the task. Finance and IT departments operate their own systems for recording IT expenditure. Some items of information are duplicated, others are recorded in only one system and others are not recorded at all. As a result, there's no way of identifying expense items and assigning them to individual IT assets, or groups of assets, or even to the IT installation as a whole.

Overspending also often occurs during purchasing. Many firms have little control over IT procurement. Even where procedures have been set, people will still buy hardware and software from a budget other than the official IT budget. In some cases this is a result of ignorance; in many others it is simply an unwillingness to get tied up in red tape for a relatively small purchase. AS well as missing out on any bulk-buy discount that may have been negotiated, people rapidly lose any idea of what has been bought or even where it is, let alone how much it is costing to keep it.

The expenditure clearly cannot be controlled if it's unknown--a particularly undesirable situation at a time when profits are being squeezed. But even more serious issues are at stake: a lack of accurate information means a lack of transparency and an inability to manage risks. The last thing any company needs is even a hint of accounting ambiguity, let alone irregularity.

The solution must start with a recognition of the problem and a willingness at senior level to prioritise it. An essential first step is to make a list of all hardware and software in the organisation. This is a major task, and one that's best outsourced to a specialist, but businesses can make significant savings simply by making an inventory. One of my firm's clients saved 17,000 [pounds sterling] a month simply by not paying maintenance charges on returned or scrapped PCs, for example.

The next step is to put in place a comprehensive system to control the organisation's IT and other assets. This must include tracking facilities, to allow regular physical asset audits, and also auto-discovery software that interrogates the IT system to provide a breakdown of the hardware and software that's installed.

Procedures must be put in place to ensure that all IT-related spending is recorded. This can be done by using a system that enables costs to be assigned to individual assets or categories of assets. KPMG recommends giving a senior manager authority over all IT asset management and licensing matters, making them accountable to the board and rewarding them in proportion to the cost savings achieved.

There must be a policy on which items are to be capitalised and which are to be expensed. Guidance on when an investment should be capitalised is outlined in a series of standards produced by the UK Accounting Standards Board--although experts do admit that there is still a grey area for certain types of IT investment.

Armed with comprehensive information about the physical existence, financial value and ongoing costs of IT assets, it becomes possible to control these costs and reduce your firm's outgoings significantly.

Stephen Moriarty is managing director of AssetWare Technology