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What is TCO?

computer, TCO, total cost of ownership
Companies wanting to rein in their IT expenses can calculate the total cost of ownership before purchasing new technology.
Credit: Pressmaster | Shutterstock

The term TCO, or Total Cost of Ownership, is used to describe the potential cost of purchasing or bringing a technology in-house. A company would calculate TCO to identify the total cost of not only purchasing, but also operating technology products or services such as cloud computing. TCO provides a method to evaluate technology costs that aren’t reflected or apparent in upfront costs.

The purpose of TCO

If your company is about to purchase a new server, the cost of the equipment — from hardware to database software to storage — only accounts for up to 25 percent of the overall long-term costs. When you factor in the additional expenses of installing, maintaining, upgrading and supporting the server, the costs significantly increase.

While some companies factor TCO into a purchasing decision, they oftentimes underestimate the added costs of a new technology solution. Such an oversight results in potentially negative consequences, from frequent technology failures to inadequate support. If your company doesn’t have staff experienced in maintaining the solution, then critical upgrades and patches may be skipped simply to keep the present technology running at its current level of security and performance.

Calculating TCO

Many companies can easily determine TCO through a simple return on investment (ROI) calculation, but the different types of costs associated with acquisition, maintenance and operation may make such a formula inadequate. TCO creates a framework for evaluating competing solution, all while avoiding hidden costs.

  • Planning and selection. Not only should TCO factor in the costs after the purchase, but it should also take into account the amount of time employees will need to evaluate solutions and identify service level agreements.
  • IT infrastructure. If you’re purchasing an on-site solution, you’ll need to factor in the costs of hardware and software purchases needed to run the solution. How will this affect your current IT infrastructure from IT personnel to storage space?
  • Licensing and subscription fees. Does the solution charge a one-time fee or are there single-user licenses and yearly subscriptions to take into account? Consider whether maintenance costs for patches and upgrades are offered free or for an added cost.
  • Application configuration and implementation. You’ll need to identify the resources and expertise needed to configure the solution to work for your organization and then implement it. Successful implementation also includes troubleshooting and additional customizations.
  • Administration and maintenance. Once a solution is successfully implemented onsite, you should consider how this will affect your current staffing. How much time will maintaining the new systems take your employees and will you need to hire additional staff?
  • Training fees. The purpose behind purchasing a new technology solution is to improve the productivity of employees, which means they need to know how to use the solution in the first place. What type of training should you prepare and how often?

TCO is a very important practice for most companies and forces you to consider the diverse expense types you might face with a purchasing decision. Most companies tend to under-invest when it comes to thoroughly evaluating technology solutions, which TCO helps to counteract.

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