What Does Total Cost of Ownership Mean?
Total cost of ownership (TCO) has two connotations, a general definition and a definition that applies to information technology (IT). Generally, this definition refers to a financial estimate of all direct and indirect costs associated with a purchased or acquired asset over its entire lifetime, life expectancy or life cycle. It is intended to aid consumers and business entity managers determine the total costs of owning a given product, system or other asset.
In information technology this refers to a financial estimate of all direct and indirect costs associated with a purchase, capital investment or acquisition of computer hardware and software. Indirect costs include initial installation, personnel training, maintenance, technical support, upgrades and downtime (estimate of business revenue loss).
Total cost of ownership is also known as cost of ownership or ownership costs.
Techopedia Explains Total Cost of Ownership
Credit is often given to the Gartner Group for originating TCO analysis in 1987. However, the concept actually originated much earlier: the Manual of American Railway Engineering Association (1929) referenced the total cost of ownership as part of its financial calculations. Total cost of ownership provides a cost basis for any financial analysis of an anticipated or actual investment. This may involve such determinations as rate of return, economic value added, return on investment or a rapid economic justification – a term with no formal definition. TCO may be used by credit market and financing agencies to determine the financial viability or profitability of a business entity by including such accounting methodologies as total cost of acquisition and operating costs. The business entity may also use TCO for a product or asset comparison analysis.
TCO in computing attempts to determine the financial impact of using technology over the life cycle of the training required as well as the hardware and software employed. Three general categories of deploying technology are used to determine TCO, including:
- Hardware and Software:
- Servers, workstations and network hardware and software, and their installations
- Costing analysis for hardware and software and installation
- Associated warranties and licenses
- Compliance costs, such as tracking licenses
- Migration expenses
- Risk assessment concerning:
- Various vulnerabilities
- Availability of upgrades
- Future licensing policies
- Other similar risks
- Operating Expenses:
- Security costs and failures such as breaches, damaged reputation and recovery costs
- Utility expense, especially electricity for electronic equipment, HVAC (heating, ventilation and air conditioning) and electronic equipment cooling
- Infrastructure (buildings/data centers or floor space lease/rental)
- Information technology personnel
- Executive oversight/management time
- System testing
- Slow processing performance, especially user dissatisfaction and the associated decrease in revenue
- Backup and recovery processes
- Personnel training
- Internal and external auditing expenses
- Long-Term Expenses:
- Upgrades and scalability expenses
- Equipment replacements
- Decommissioning equipment and facilities
TCO analysis for consumers includes equipment purchase, upgrades, training and training time, repairs, maintenance, increased utility bills, office/computer furniture, etc. TCO is even sometimes described as a “buzzword” for how much it actually costs to own a personal computer (PC). Some estimates place the TCO at 300 to 400 percent of the PC’s purchase price. This is cited by those advocating network computers with centralized software as less expensive, meaning less expensive than the time and expenses involved with purchasing, installing and upgrading software onto a PC. However, Microsoft and Intel argue that there is significantly reduced TCO when networked traditional PCs on a local area network (LAN) use locally installed software.