Asset Value (AV) and Total Cost of Ownership (TCO)

Quantitative Risk Analysis

We're going to get into quantitative risk analysis, and in order to do that we have to understand a couple key terms: asset value, and total cost of ownership.

When we get into quantitative risk analysis, what we're doing is we're using equations to calculate what a loss is going to be. So here we have a probability, which is a percent, times impact. Well, the impact is going to be a loss in monetary value, a loss in money. The impact it has is not going to necessarily be on money itself, but there's going to be a recovery that's going to need to happen, and that's going to cost money or time or resources. It's all going to equate to money from a business perspective.

Let's give an example of that. Let's say we have a building. A building is an asset, and so we have this asset here, and there's going to be an earthquake. The probability is going to be different depending on where it's going to be at, but also the impact. For instance, I live in a location that can have small earthquakes, but it also can have very large earthquakes that can have a huge impact on the whole infrastructure, where other people live in places that probably the earthquake is not going to have as big of an impact. So here I might say, well, this building could have a 100% loss, all of the asset value. Or if I live somewhere else, maybe it's going to be where the most devastating earthquake might just have a 20% loss.

Asset Value

In order to really understand that, we have to understand what the asset value is to begin with. That's pretty easy when we're dealing with currency. If I have a certain amount of money, then that's how much money I have. It's a direct correlation. Buildings are usually pretty easy to evaluate: there are market researches and there's purchase prices, and there's things that go into buildings that it's pretty easy to understand what the value is of that asset.

Same thing with reputation. If you have a brand name and you look at everybody else, let's say it's tennis shoes, and everybody else is selling their tennis shoes for a certain amount of price but you can charge a certain amount more, then that is the value of that brand. There's a reputation behind it, there's a brand behind it, and so there's a value to all of that, and we can calculate what that is.

There's also data and customer information, so there's that value attached to that. That's a little bit harder to figure out. There is code. It'd be like if you were to take your code and be able to sell it to somebody else, what would that look like and how much could you get out of it? So that would be a value there. And then, like I say, I have some companies that even consider their employees as being an asset to the company. So in that case, what happens if one of them were to leave? How detrimental would that be? Well, that's an asset value there.

Depreciation

Now, typically in companies you have assets that are tracked and assets that aren't tracked. Assets that aren't tracked are usually assets that don't have a lot of monetary value and it's not as big of a deal, versus assets that are a little bit larger are tracked in the company. Not only that, but they're depreciated, so they have a depreciation schedule that happens.

Let me just give you an example. When you buy a car, you buy it for a certain price, and let's say I buy a new car. Those can be awfully expensive. But as soon as I drive it off the lot, it drops in value. Somebody is unwilling to pay me the same amount that I had purchased from the dealership. They're not going to pay me as much because it's already considered used, so it has a drop in value. Well, that's depreciation, and that depreciation has a big drop once you buy it and then smaller drops. A company will take the asset value, the value of the asset, what they purchased it for, and then divide it by a certain number of years and depreciate that value over those years. So that's an example of depreciation.

Total Cost of Ownership

There is a problem with just using asset value, or AV, as being your sole measurement. There are a lot more expenses that go into an asset. For instance, let's say we have a bunch of servers that we rolled out. There's a cost to those servers, so that's the asset value, and that gets depreciated over time. So that's the purchase cost right there.

But also with that there's a deployment cost. It takes people to deploy that server, and licensing to deploy that server, and all of that goes into a monetary cost for the company. When it comes to people who have to deploy this server, it's the salary that they have, or the hourly rate that they charge them to roll out that server.

There's also operating costs that happen with that. There's power that goes into this, there's heating and air conditioning that goes into it, there's things that go into powering these servers. And then there's ongoing maintenance that has to happen on these servers, so you have an IT team that's going to jump on there and do patching and do certain things to it. There's training that may have to happen, depending on what these servers are and what they do and why they're rolled out, that there's some sort of training that happens, maybe perhaps to the IT department or the rest of the company, to use the software that's being rolled out or the services that are being rolled out. And then there's a bunch of process changes that happen through rolling this stuff out as well.

So the total cost of ownership is taking into consideration all of this together. Usually what happens is it's over a period of a time frame. Maybe we expect these servers to be good for 3 years, or maybe it's 5 years, or whatever the case may be. Let's use 3 years, because that's fairly standard out there. Then we take the operating cost and the ongoing maintenance cost, and all of that gets rolled out over a three-year period and then figured into this total cost of ownership.