TCO (total cost of ownership) definition

Contributor(s): Stephen J. Bigelow

Total cost of ownership (TCO) is an estimation of the expenses associated with purchasing, deploying, using and retiring a product or piece of equipment.

TCO quantifies the cost of the purchase across the product's entire lifecycle. Therefore, it offers a more accurate basis for determining the value -- cost vs. ROI -- of an investment than the purchase price alone. The overall TCO includes direct and indirect expenses, as well as some intangible ones that may be assigned a monetary value. For example, a server's TCO might include an expensive purchase price, a good deal on ongoing support, and low system management time because of its user-friendly interface.

TCO factors in costs accumulated from purchase to decommissioning. For a data center server, for example, this means initial acquisition price, repairs, maintenance, upgrades, service or support contracts, network integration, security, software licenses (such as Windows Server 2012 R2) and user training. It can even include the credit terms on which the company purchased the product. Through analysis, the purchasing manager might assign a monetary value to intangible costs, such as systems management time, electricity used, downtime, insurance and other overhead. The total cost of ownership must be compared to the total benefits of ownership (TBO) to determine the viability of a purchase.

There are several methodologies and software tools to calculate total cost of ownership, but the process is not perfect. Many enterprises fail to define a singular methodology. This is bad because they cannot base purchasing decisions on uniform information. Another problem is that it is difficult to determine the scope of operating costs for any piece of IT equipment; some cost factors are easily overlooked or inaccurately compared from one product to another. For example, support costs on one server include the cost of spare parts. This might make support cost more than it does on another server, but eliminates an additional cost factor of parts acquisition.

Cost of ownership analysis generally doesn't anticipate unpredictable rising costs over time, for example, if upgrade part costs jump substantially more than expected due to a distributor change. TCO calculations cannot account for the availability of upgrades and services, or the impact of vendor relationships. If a vendor refuses to offer service after three years, no longer stocks parts after five years or ends support for certain software, the business may be subject to unexpected and significant additional costs which could drive the TCO far beyond its initial estimate.

Enterprise managers and purchasing decision makers complete total cost of ownership analysis for multiple options, then compare TCOs to determine the best long-term investment. For example, one server's purchase price might be less expensive than a competitive model, but the decision maker can see that anticipated upgrades and annual service contracts would drive the total cost much higher. In turn, one model's TCO may be slightly higher than another model's, but its TBO far exceeds that of the competitive offering.

Without TCO analysis, enterprises could greatly miscalculate IT budgets, or purchase servers and other components unsuited to their computing needs, resulting in slow services, uncontrolled downtime and other problems.

This was first published in April 2015

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