The Total Cost of Ownership (TCO)

As a business, when evaluating what a good or service will cost to purchase or implement, are you giving any thought to the total cost of owning it? What will it cost you to use it? Maintain, repair and upgrade it? Will end users adopt it? Will staff spend all of their working time playing with it or fighting against it? Complaining about it? You need to make sure you're asking the right questions from your suppliers when considering introducing something new.

In the world of Information Technology, the concept of Total Cost of Ownership (TCO) is important for both customer and vendors alike. As a customer, the initial cost of acquiring the product or service may be relatively small when compared to the annual cost for the maintenance and support of the product. Effective businesses research their products and services in order to establish an understanding of the expected total cost of ownership over the life expectancy of the offering.

 
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Basics of Total Cost of Ownership:

By design, Total Cost of Ownership (TCO) is a calculation designed to help people make more informed financial decisions. Rather than just looking at the purchase price of an object, TCO looks at the complete cost from purchase to disposal, including expected costs to be incurred during the lifetime of the product, such as service, repair, and insurance.

Total Cost of Ownership is Nothing New

Although TCO is often referenced in connection with Information Technology (IT) the concept has been around since the 1950's and 60's when it was regularly discussed in the elevator industry.

Apparently, the notion could date back to Napoleon’s time when "engineers began to pay very close attention to issues like the effectiveness of cannons and how easily they were moved and repaired, and for how long they lasted in active service."

Total Cost of Ownership and IT

  • Information Technology Hardware. TCO has been used extensively in the acquisition of information technology hardware. Estimates for the TCO of hardware typically estimates the cost for out-of-warranty repairs, the cost of annual service agreements, and the prorated cost of additional hardware and software required to leverage the hardware. As the number of web service providers continues to increase, more and more IT firms lease space from these providers, thus eliminating large investments in hardware and, consequently, reducing the annual costs and the TCO incurred for running a firm's software applications. 

  • Traditional Software Licensing. For much of the history of the software industry, licensing was purchased based on an initial cost (or license fee) plus an annual software maintenance fee which was calculated as a percentage of the original license fee. Initially, this annual maintenance agreement included bug fixes and feature upgrades when available. However, this type of perpetual licensing has lost popularity in favour of subscription-based licensing whereby the client re-purchases the right to use the software on an annual basis. 

Many IT consultants conveniently factor in only the costs of purchasing hardware and software when putting forward a solution. This isn't surprising; when pressed for time, they only take into account what's easy to find out. In the relatively easy-to-manage world of servers and centralized computing systems, hardware and software accounted for much of the cost factors. In the current era of cloud, and the use of multiple applications and the costs of implementing and integrating systems are often much higher and cannot be ignored. For example, adding an application that is not compatible with any of your other systems. Or purchasing hardware that will be out of date or unusable when a particular piece of software is updated.

If you are reviewing your current infrastructure or services or wanting an external audit to ensure you are following best practice or thinking about upgrading any software or hardware in the future it may be worthwhile talking to one of our consultants.