Thought Leadership – The Total Cost of Covid-19
By team of experts at Magic Orange
The Coronavirus pandemic and consequent global lockdown has upended traditional operational models. Exiting the crisis stronger than ever will require an understanding of the total cost of Covid-19.
The impact of the Covid-19 pandemic is already being felt. However, the worst financial impact of this crisis is yet to come and is something that will only occur once lockdown ends and organizations can begin the arduous process of trying to restart the global economy.
As businesses juggle a range of new systems, priorities and challenges, namely: business continuity concerns; sudden changes in volume; real-time decision-making; workforce productivity; security risks; and most importantly the overall cost to the business, the amount of potential change to think through can be daunting.
It is here where the real concern arises – how are businesses across the globe handling and managing the impact of Covid-19? After all, its financial impact is severe, and the reality of the situation is such that for most of these organizations, the difference between survival and closure will lie in their ability to measure and understand the impact of, and their response to, the current pandemic.
With this in mind, it is worth considering the cost saving and cost optimization initiatives being implemented by businesses, in regard to Covid-19. Those that understand that the best way to deal with the crisis is to understand and manage their Total Cost of Ownership (TCO) of Covid-19 (TCO-C) will likely find themselves ahead of their competition.
As the pandemic has taken hold, businesses have begun responding with immediate action, short-term cost containment responses. These have included:
- freezing travel and entertainment expenditure;
- cancelling conference attendance;
- furloughing staff;
- freezing hiring; and
- delaying hiring
Of course, those organizations that have the capability, have transformed their operations into mobile or work-from-home environments. While this has enabled business to continue, many of the short-term TCO-C savings achieved have been offset by additional mobility-related expenses. This might encompass everything from the procurement of laptops, to network capacity and bandwidth, and on to software licenses for virtual tools such as Office365 and Zoom.
Then, considering at the medium-term, it is anticipated that cost containment responses here might well include right-sizing products and services for the increased remote working situation. Examples here include:
- reducing real estate costs;
- reducing network and bandwidth costs;
- auditing and improving security by reducing non-essential staff or services;
- delaying or freezing marketing spend; or
- restructuring/freezing vendor contracts or delaying payment with service providers.
In particular, they will need to look at their real estate exposure, whether rented or owned. After all, CEOs are for the first time, seriously questioning the need for expensive real estate space. This follows the many successful work-from-home initiatives that have been implemented.
Consequently, understanding the cost profile without this real estate, together with knowing the new mobility workforce-related spend, is vital for businesses to accurately forecast their cost profile in the medium- to long-term. Such information will be critical to the accurate measurement of the company’s TCO-C.
Measuring and understanding TCO-C
When it comes to how businesses measure and understand TCO-C, one good approach is to ring-fence all Covid-19 spend through what is referred to as ‘initiative tracking’. This is already common practice in the IT Financial Management (ITFM) framework – ITFM is a key pillar of the broader cost transparency approach – and it is recommended that such tracking is applied to any Covid-19 related spend.
If organizations can track and capture Covid-19 initiatives effectively, they can isolate this spend in their financial and management reporting systems or ITFM tool. For example, they could use Covid-19 procurement codes, project codes or even create Covid-19 related cost centers.
For instance, spend relating to work-from-home items such as laptops, routers for Wi-Fi hotspots and mobile bandwidth could be captured and isolated to a cost center or project code to facilitate effective TCO-C reporting. While such an approach is good for understanding the impact of new Covid-19 initiatives, companies also need to understand the impact of the pandemic on all other costs as well. Essentially, what this means is that the TCO-C of the following services and product items must also be clearly understood:
- Office space – There may be a TCO-C reduction in cases where businesses exit real estate leases.
- Application spend – Those applications not related to critical business functions may warrant a decommission or form part of an application rationalization opportunity. Certain software licenses may change. For example, there could be a reduction or increase in the numbers of users of certain applications or a change in the number of users with access to core application features only. Similarly, there could be an increase in other software spend through an increase in demand for remote working applications, VPNs and video conferencing services.
- Network and bandwidth costs – Where home users are required to bear the cost of their bandwidth, there may be a reduction in office bandwidth. However, in cases where businesses not only fund home bandwidth, but may have to procure it from multiple vendors, the TCO-C may increase.
- Depreciation – Depreciating end-user devices and equipment associated with Covid-19 will also need to be factored into the TCO-C, including a possible impairment where a return to office-based work is ultimately planned, could render remote working assets unused.
- Workforce or labor costs – Labor-related changes, driven by a shift in the labor mix as businesses reconsider their full time, part time and outsourced labor requirements, must also be factored in.
- Project and software development spend – Obviously, as projects and software developments get reprioritized by the crisis, so there will be an impact to the TCO-C of these initiatives. In addition, the TCO-C impact of any project and software development reprioritization, delay, cancellation or new high priority items will clearly need to be understood.
In the end, it should be clear that by properly recognizing the impact of this pandemic on the TCO-C of all products and services, enterprises will be better positioned to truly understand, and therefore more effectively manage, their business activities and initiatives during this crisis.
Ultimately, what is required is a framework that helps the business to make all its costs transparent, and thus clearly understandable. In essence, a framework that produces targeted, actionable information relating to business – or in this specific instance, Covid-19 – costs. With such knowledge, these entities will stand the best chance of exiting this global crisis stronger than ever.
Magic Orange is the solution to support this framework. A progressive cloud-based platform that helps enterprises to understand, know, manage and optimize their costs and ultimately grow their value despite the current crises. Please contact us on firstname.lastname@example.org should you wish to discuss how you can understand and manage the impact of COVID-19 today and beyond.