Several times I have used the term Total Cost of Ownership or TCO in posts on this blog. For this particular post, I want to define it a little better, and show how it can affect SMB’s in their IT Costs.
Technology research firm Gartner Group coined the term back in the ’80′s as a cost analysis model for measuring the costs of an IT asset over its entire lifecycle. At one point they even had a Compact Disk based program that allowed businesses to plug in their IT costing numbers and the tool would assist in qauntifying this TCO.
I have generally used the term TCO only in reference to purchasing physical devices such as computer hardware, although the original TCO toolsets were designed to support acquisition of larger IT ‘systems’ such as complex software that consist of both software and hardware components etc. For these larger, more complex systems, the tools were not perfect, as they do not account for true derived value (eg one system may have a significantly higher cost, but also a significantly higher benefit) and they also could not account for time value of money and other quantitative financial measures.
So does TCO matter?
The answer is yes. The concept of Total Cost of Ownership is still key for managers in the small to medium business because it forces us to stop thinking that the initial purchase price (one direct cost) of any IT asset is the actual price that you are going to pay.
Your purchase price does not include the ongoing and often hidden costs (indirect costs) that accrue with an asset over that assets lifecycle. When purchasing any IT asset. (including something as simple as a single personal computer) These direct and indirect costs will include both dollars and time in;
• Planning and acquisition
• Deployment
• Management and support
• Retirement/replacement
Direct Costs
The direct costs are the easiest to understand and at least some of them are the costs we usually associate as the common expenses of the IT asset purchase. These can include capital expenditures or lease fees for servers, or other IT assets. The labor required for deployment or any potential professional services or outsourcing fees. Direct costs can also include budgeting for help desk labor hours, training labor etc.
Indirect Costs
Indirect costs are generally a little more difficult to categorize. These type of costs include assumed costs for providing ongoing support through a concept called “shadow” support. (when advanced and skilled users provide support) For example, the mail-merge expert helps out other staff members get mail-merges working correctly. And secondly there is the calculation of downtime. This refers to the lost productivity due to planned and unplanned system unavailability.And it is this hidden downtime factor that I have written about.
The quick note takeaway
The actual calculations in the TCO toolsets will vary by large amounts depending upon your industry, and your level of IT maturity – in other words, the more automation in your IT operations, the less expensive this total cost of ownership can be.
But as a general average, Gartner provided this little rule of thumb; On average, consider your indirect costs to be approximately five (5) times the direct asset purchase price – per year. (yes – annually!)
The Danger!
Here is the danger. Using the above rule of thumb, you calculate that the powerful business class name brand laptop with lots of processing power, RAM, DVD-R, and huge disk space at $2400.00 will have a full TCO cost over five years of about $12,000.00
So you look at the Bill & Teds computer Co. No-Name special unit at $400.00, which over the same five years would only be about $2000.00
However, if you do this, you actually risk increasing the TCO cost due to the indirect costs listed above. Lack of productivity, downtime as substandard componenets fail, upgrades trying to get the device to improve. (see this previous article) All of these indirect and hidden costs can dramatically increase the cost of that asset over its lifecycle.
Update: Some newer numbers on TCO by Gartner are referenced here
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