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What is total cost of ownership?

We explain what total cost of ownership is and how a business can calculate it

Calculator and pen on a paper

Total cost of ownership (TCO) refers to the calculation that helps businesses work out exactly how much equipment, a service or other resource will cost over its entire lifetime.

This could include servicing, maintenance, upfront and monthly/annual recurring costs, plus the resource needed to make the equipment or service operate.

The phrase total cost of ownership in IT terms was popularised by Gartner in the 1980s, with its roots going back to the beginning of the 20th century as an overall concept.

It was developed as a way to work out the financial impact of introducing new technologies into a business, offering an insight into how much a decision will cost the business in the long term.

Although different people view different factors as contributing to the TCO, the most common are:

  • Upfront equipment costs
  • Setup costs
  • Maintenance and servicing
  • Training for employees
  • Warranties and licenses
  • Costs of migration
  • Risks (including security patches)
  • Downtime, outage and failure costs
  • Running costs (such as electricity and floor space needed)
  • Personnel costs to operate the equipment
  • Auditing
  • Insurance
  • Future upgrades
  • Decommissioning the equipment

How to calculate total cost of ownership

With so many factors to consider, calculating the TCO can be a rather long-winded and costly process in itself.

Not only is it hard to work out what you need to include in your calculations, but there are also so many unknowns (for example, how can you predict the cost of an outage if you don't know how long that outage will last for, what the cause will be or what part of your business it will affect?).

The most effective way of calculating a TCO is by developing a stringent process so you can conduct a side-by-side comparison of the products you're considering. This could be by forming your own formula to help you assess each factor.

For example, ensure you look at the TCO over a set period of time rather than its entire lifecycle (for example, five years), use the exact same risk factors for each product (if an outage occurs meaning your sales team is not able to access the CRM for 24 hours, how much will this cost in lost business?) and every other possible scenario on a level playing field.

It's a good idea to recruit stakeholders from across the business to form estimates based on their knowledge. For example, the HR team will be able to help with training and resource costs, IT managers with security risks, migration costs and maintenance overheads and the facilities department to help calculate space costs if there are any.

You should also discuss these costs and concerns with the vendors. Although it's easy to get swayed when competitors are talking about the downfalls of their rivals, they know the industry best and will be able to provide some valuable insight (such as the number of outages their main competitors have suffered and the business impact).

Although calculating the TCO can seem a complicated and arduous task, the benefits will outweigh the effort. Not only can you ensure you're using your budget as efficiently as possible, but you may also uncover challenges with some of the options you're considering.

Like any business matter, having the process and team behind you to help you calculate the TCO is vital, making your workload easier and the costs more likely to be accurate.

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