Total cost of ownership

From Free net encyclopedia

Total cost of ownership (TCO) is a financial estimate designed to help consumers and enterprise managers assess direct and indirect costs related to the purchase of any capital investment, such as (but not limited to) computer software or hardware. A TCO assessment ideally offers a final statement reflecting not only the cost of purchase but all aspects in the further use and maintenance of the equipment, device, or system considered. This includes the costs of training support personnel and the users of the system, costs associated with failure or outage (planned and unplanned), diminished performance incidents (i.e. if users are kept waiting), costs of security breaches (in loss of reputation and recovery costs), costs of disaster preparedness and recovery, floor space, electricity, development expenses, testing infrastructure and expenses, quality assurance, incremental growth, decommissioning, and more. Therefore TCO is sometimes referred to as total cost of operation. When incorporated in any financial benefit analysis (e.g., ROI, IRR, EVA, ROIT, RJE) TCO provides a cost basis for determining the economic value of that investment.

For example, the decision to buy a computer may result in the following TCO analysis: the greater initial price of a high-end computer is to be balanced by adding likely repair costs and earlier replacement to the purchase cost of the cheaper bargain brand, among other factors. The initial price becomes just the beginning of the life cycle of costs.

TCO analysis originated with the Gartner Group in 1987 and has since been developed in a number of different methodologies and software tools. The purchase of equipment can include initial purchase price, repairs, maintenance, upgrades, service and support, networking, security, user training, and software licensing, among other expenses.

The TCO concept is widely used in the automobile industry. In this context, the TCO denotes the cost of owning a vehicle from the purchase, through its maintenance, and finally its sale as a used car. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget.

Many consumers, businesses, and governments fail to understand and calculate TCO and instead rely on TCA (Total Cost of Acquisition) to make buying decisions. Also, in some cases, purchasers may not bear all of the TCO-related costs directly even though their parent organizations always do (i.e. "cost shifting"). TCO can and often does vary dramatically against TCA, although TCO is far more relevant in determining the viability of any capital investment, especially with modern credit markets and financing. TCO also directly relates to a business's total costs across all projects and processes and, thus, its profitability.

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