An Introduction to Total Cost of Ownership (TCO)
Business success requires close monitoring, examination and optimization of all expenses. There are both obvious and anticipated expenses and other less intuitive expenses. It is easy to know the upfront costs around the time you initially purchase an item. However, the initial price tag does not reflect the total costs related to ownership. The initial price tag might only be a small portion of what the item actually ends up costing you over the long term. This is particularly true when it comes to software and hardware purchases. This is an area where you need to calculate the total cost of ownership, which reflects the real life costs from purchase to disposal.
What is total cost of ownership?
Total Cost of Ownership (TCO) is a financial estimate used to calculate the direct and indirect costs associated with the purchase and ownership of something over time. In IT, TCO is a comprehensive assessment of all your IT costs and specifically includes hardware and software acquisition, management and support, communications, end-user expenses, opportunity cost downtime, training, and other productivity losses. Simply put, it is the sum of all possible costs related to buying and owning a product. TCO also evaluates the costs associated with software and hardware over the duration of their lifecycle. This includes implementation and maintenance.
Importance of Total Cost of Ownership
The proper calculation of TCO is vital to businesses as it not only factors in the immediate costs of ownership, but it also estimates and tracks the long-term costs. If not initially prepared for, these costs can result in unwelcome financial surprises. TCO is critical for any return on investment (ROI) analysis.
Total Cost of Ownership for Software
In addition, total cost of ownership provides insight into which software investments are the most beneficial for your business growth. It is better to be aware of the full costs up front rather than finding yourself having to invest more money and time into making a switch to another software package a few years down the road. The TCO of software is much more than the ticket price. It includes:
- Real costs associated with implementing the software
- Training staff on using the software
- Making changes to your operations
TCO Analysis for Software
When performing a TCO analysis, there are 3 broad categories of costs to take into consideration.
1. Acquisition Costs
These are the most immediate and therefore the least surprising costs associated with ownership. They can be broken down into the following specific costs:
- Software: This is the cost of the software itself, its subscription, and all fees and taxes associated with its purchase.
- Hardware: How much storage/space will your software require? Will your company need to upgrade your hardware in order to run the software at maximum efficiency?
- Implementation: This is the cost of installing the software and ensuring that it runs smoothly with whatever setup your company has.
- Customization: Any changes that need to be made to the software to make it more accessible and efficient to your business will likely incur additional fees.
- User Licenses: Depending on the type of software, you may have to purchase licenses for each of your users. Sometimes this requires bulk purchases.
- Training: Making sure that your staff is knowledgeable about the new software will require training resources.
2. Operating Costs
These costs span the lifecycle of the software and include:
- Maintenance: This includes costs associated with the maintenance of your software, as well as updates and upgrades.
- Ongoing Training: Every software update will require some additional staff training.
- Support Costs: Customer support services for some software will involve additional fees.
- Downtime: If the software is down, how will it impact productivity? What are the costs associated with lost time?
- Security: How strong are your company's security measures, and how would any breaches to your network security impact the functionality of your software?
3. Staffing or Resource Costs
Does running this software require additional staff or support? This includes hiring in-house consultants or having a third-party consultant to manage your software. You may need professional and knowledgeable training to use your software to boost operations and functionality and to help you achieve your goals. Consultants are also on top of trends and changes in the industry and can help your business stay ahead in a fast-changing market.
The initial price tag might only be a small portion of what the item actually ends up costing you over the long term.
Total Cost of Ownership for Hardware
When thinking about hardware, which can include desktop computers, laptop computers, switches, routers, phones, devices, wireless and security appliances, etc, the total cost of ownership may also depend on what company you choose as a partner. Some of the costs will be similar to those associated with software, while other costs will be completely unique. For example, how much power does it take to run the hardware? What is the cost of disposing of a computer? Total cost of ownership goes up again. Here are some examples of the costs related to owning hardware.
- Initial cost of devices
- Updating systems due to incompatible tools
- Training/hiring staff
- Making changes based on unforeseen consequences
- Maintenance/hardware replacement services
- Opportunity cost
- Disruptions during migration
- Power costs
Determining TCO is not intuitive. Before making your next software or hardware purchase, seek expert advice to help you determine your total cost of ownership related to the purchase.
If you are buying new hardware or software, get in touch with CITI. We are a reseller for the best-known brands in the world, including HP, Dell, IBM, Samsung, Lenovo, and Apple. Before you buy, we will calculate your TCO so you make the best decision.