Sep 10, 2021 12:38:39 PM by: Scott Morgan

Just because we are used to doing things a certain way, does not mean that is the only way, or that is the right way, or that is the best way, or that way won’t change.

For decades the technology industry has led you to believe that an outright cash purchase was a reasonable way to pay for the solution. However, the landscape has changed. As a financial trailblazer and leader in the technology industry with almost 30 years of expertise, we can no longer conscientiously remain silent and witness organizations become subject to the pitfalls of this dated belief.

Let’s consider three key factors regarding the economics of ownership that you need to be aware of before making an outright cash purchase of another technology system.

01. Technology Solutions Are Non-Revenue Generating Assets

Astute, financially responsible organizations attempt to spend their hard-earned capital on assets that function like investments and will therefore produce interest, revenue, or appreciation. Technology solutions like AV, security or related technology produce none of these financial benefits. They are absolutely essential to operations, but from a purely financial perspective, technology is simply a pile of depreciating assets.

02. Technology Solutions Have A Lot Of Non-Recoverable Costs

You have probably heard the saying that a new car depreciates the second after you buy it and drive it off the lot. The same is true with an organization’s technology solutions but to an even greater extent. I’ll explain how.

The sale price of all solutions will include certain non-recoverable costs. Examples include costs associated with manufacturer margin, distributor margin, vendor/integrator margin, design services, installation, training, and other services.

Non-recoverable costs are relevant because in a sense this portion of the solution price disappears immediately after installation. While you still have appliances and software and physical components that have potential resale value, there is no resale value to you for the margin, installation, and other non-recoverable costs components that went into your original purchase price.

In addition, most customers do not realize that a significant portion of the solution purchase price consists of non-recoverable costs. In fact, they can often be 50 percent or more of your total purchase price. So the day after installing your solution is probably worth half of what you paid or less.

As disturbing as that might feel for you, this is normal and unavoidable regardless of the technology solution and regardless of the technology integrator chosen to work with. It is just the nature of technology solution sales in general. The important thing is to be aware of this reality because this is not the type of asset you want your organization to own.

Old type writer and laptop to display technology advancement and understand depreciation in technology

03. Technology Solutions Are Subject To Rapid Obsolescence

As an industry leader and to provide valuable advice and guidance when needed, we pay close attention to the amount of money technology manufacturers spend on research and development (R&D).

R&D spend continues at a pace of billions of dollars each year. Surprisingly even in 2020 publicly traded companies we monitored placed an average of 17.5 percent of their revenue back into R&D. And that was a pandemic year!

As a result, over the past five years, the advancement in all technology industries has skyrocketed. It’s just common knowledge that what is bought and sold today, will be obsolete in two to four years. The R&D engine of capitalism ensures this will continue.

Therefore, rapid obsolescence is another reason why these solutions plummet in value so rapidly, and more importantly why organizations should never use CAPEX dollars to pay for them.

Let’s Recap

Non-revenue generating assets, non-recoverable costs, rapid obsolescence. Any one of these factors should give pause to making an outright cash purchase. But the combination of all three simply defies all the principles of using cash or capital expenditure for today’s technology solutions, even if you have the budget for it.

What Can Financially Responsible Organizations Do?

We firmly believe in the value of technology-as-a-service solutions that have a subscription model of payment. Using this type of solution approach removes all of the pitfalls discussed here and provides compelling additional value.

Discover more about TAMCO’s exclusive technology-as-a-service solution, Shield, which provides customers with a convenient monthly subscription payment plus added protection, control, and flexibility for today’s ever-evolving and changing environment.

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