What is the Total Cost of Ownership?

What is Total Cost of Ownership (TCO)?

Total cost of ownership refers to all costs associated with owning and operating an item over its lifetime. It includes both direct costs — such as maintenance and fuel — and indirect costs — such as depreciation and insurance. TCO allows businesses to evaluate their products based on all factors that contribute to the overall price tag rather than just the initial purchase price. This gives them a better idea of how much money they'll lose in maintenance fees and other expenses associated with keeping their products running smoothly.

TCO is used across a wide range of industries and can be applied to many different products and services. For example, when considering whether to lease vs buy office space for your business, you can use TCO to compare the total cost of ownership over time for each option.

So, Total Cost of Ownership is a comprehensive term that is associated with many similar concepts in business. Here are some of these similar terms:

1. Purchase price: One-time fee for buying the asset.
2. Associated costs: Extra users, extra storage etc. Everything related to the asset.
3. Acquisition cost: Except for the sales taxes, the acquisition cost is the concrete cost of purchase after taking all the discounts, taxations etc. are taken into consideration.
4. Cost of ownership: Despite sounding very similar to Total Cost of Ownership, Cost of Ownership does not deal with all the costs in an asset’s lifecycle.
5. Maintenance costs: A part of Total Cost of Ownership.
6. Usage costs: Taken into account by Total Cost of Ownership. Also, Running Cost is an important subject to further optimize the budgets.
7. Non-quality costs: This term is associated with failure and prevention costs of an asset.
8. Disposal costs: Also a part of Total Cost of Ownership, disposal costs are the financial resources necessary in order to retire an asset.

Identifying the Total Cost of Ownership and optimizing the budget according to it is quite important for business. Here, find out more about the ways to optimize budget in the IT landscape.

What are the Types of Total Cost of Ownership?

Not limited by these, Total Cost of Ownership involves each and every expense item relating to the purchase and usage of an asset. Pre-transaction components, transaction components, post-transaction components are other ways to classify the Total Cost of Ownership.

Let’s see these components in detail:

• Pre-Transaction Components: Every expense item before the actual purchasing of the asset.

a.Product selection: In order to select a product, some companies may require a paid subscription to their marketplace.

b.Supplier integration: Some digital purchases might need a specific integration roadmap. Preparing such a roadmap and buying the necessary integration components are also involved in the Total Cost of Ownership.

• Transaction Components: Financial resources allocated during the actual purchase process.

a.Purchase price

b.Delivery: Also known as shipping.

c.Return and correction: If the asset has malfunctions physically or digitally, a re-evaluation by the supplier might be necessary. This may also require time, effort, and money.

d.Installation: Setting up the purchased item and integrating it with the currently used systems.

e.Attachments purchasing: Some assets might need complementary products to be fully integrated with the existing systems.

• Post-Transaction Components: After the purchase, the assets continue requiring certain resources to run flawlessly.

a.Training: In order to be able to use an asset, the personnel should be taught about it.

b.Consumables (energy, equipment): These are also identified as expense items as the asset requires electricity or other utilities to run.

c.Waste: Sometimes negligible, every purchase might have some waste.

d.Maintenance: To keep the asset intact, ordinary maintenance and check-ups are necessary. To conduct such, allocating money and personnel is the way to go.

e.Technical support: Sometimes, the buyer might need consultancy and/or technical support.

f. Disposal: When the lifecycle of an asset has ended, certain methods for disposal is necessary depending on the type.

These could be breakdown expense items in an asset’s lifecycle. All in all, a business should be monitoring its assets’ lifecycles to identify the Total Cost of Ownership. Application Lifecycle Management (ALM) is a concept under the umbrella term IT Asset Management. Visit this article about Application Lifecycle Management.

Why do We Need to Total Cost of Ownership?

Total Cost of Ownership, TCO in short, is the overall financial value of a purchase process for the company. Total Cost of Ownership deals with all aspects of purchasing an asset and takes all the resources allocated during procuring into account. So, it does not only refer to one time buying cost of an asset but rather evaluates the asset more generally, adding every bit of spending to it as an overall expense item.

TCO can help businesses determine whether it makes more sense to buy new equipment or simply pay for repairs on existing equipment. It can also help companies decide whether it's more profitable to upgrade their current technology or wait until they need new equipment before purchasing it.

How to Calculate Total Cost of Ownership?

Integrated business solutions that monitor your IT assets and their lifecycles could be beneficial when it comes to identifying TCO or Running Cost. Some IT Asset Management software has built-in modules dedicated to budget monitoring and keeping track of the lifecycles. In Loggle, these modules run on the same platform and are integrated with each other. Thus, they can provide the user with an estimated Running Cost by considering all the expense items the user put into the IT Cost Management Module.

The formula for calculating TCO is:

Total Cost of Ownership = Total Purchase Price + Maintenance Costs + Opportunity Costs

Feel free to contact us to learn more about Loggle!