Too often, business owners don't grasp the full power of assessing total cost of ownership. If they calculate the TCO, they can measure, understand, and manage IT costs more effectively and boost the overall efficiency of the business.
Determining total cost of ownership (TCO) is a way of measuring, understanding, and managing IT costs. Business leaders often misunderstand what TCO is and how it should be used. This research note includes a definition of TCO and an examination of the most useful contexts for this measurement framework.
TCO Defined
The key objective of TCO is to improve the overall value of an IT investment. It does so by:
- Providing a framework for understanding the costs associated with return on investment (ROI)
- Comparing cost profiles of various environments over time
- Eliminating vendor hype in competitive purchasing decisions
TCO is a comprehensive set of methodologies, models, and tools used to help an organization assess IT costs over time. This implies the collection of all costs associated with IT investments, including capital investment, license fees, leasing costs, and service fees, as well as direct and indirect labor expenses.
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The TCO model created by Info-Tech Research Group provides organizations with a framework for managing IT costs at both a strategic level and a daily operational level. For more information, download Info-Tech's TCO Model for IT.
The TCO model breaks IT costs into two categories:
- Direct costs measure the direct expenditures on IT by an organization.
- Indirect costs measure the capital and management efficiency of IT delivering services to users.
The following table describes each of the line items associated with the two cost categories:
| Hardware and software | The capital expenditures and lease fees for servers, client computers, peripherals, and network components. |
| Management | The costs associated with network, system, and storage management, including labor staffing, activity hours and activity costs, maintenance contracts, and professional services or outsourcing fees. |
| Support | The help desk labor hours and costs, help desk performance metrics, training labor and fees, procurement, travel, support contracts, and overhead labor. |
| Development | The labor costs associated with application design, development, testing, and documentation. Also includes expenditures associated with new application development, customization, and maintenance. |
| Communication fees | The intercomputer communication expenses for leased lines, server access, remote access, and allocated WAN expenses. |
| End-user information systems | The cost of formal end-user training, casual learning, informal support outside recognized IT support channels, self-development of applications, and local file maintenance. |
| Downtime | The lost productivity due to planned and unplanned network, system, and application unavailability. |
TCO As an Analysis Tool
TCO was originally used as an analytical tool to translate the feature sets of IT products into cost metrics. It has since become a fundamental benchmarking and assessment tool for IT departments. IT decision makers use it to compare their operating efficiency internally or with peers.
TCO allows organization to measure operating efficiency by capturing the costs of IT investments over an asset's life cycle. The four phases in an IT asset life cycle include:
- Planning and acquisition
- Deployment
- Management and support
- Retirement/replacement
Gaining an accurate picture of an IT asset's operating efficiency means allocating its associated costs to the appropriate phase. Organizations that break down these costs can monitor the cost profile of each asset over time. More important, they can get a picture of the cost structure for both IT infrastructure (call centers, data center, distributed computing, storage, telecom) and IT processes (change management, technical support and operations).
Exclusive Tools & Resources from Info-Tech Research Group:
- TCO Calculator
- TCO Model for IT
- ROI Calculator
- Feasibility Study Template
- Cost/Benefit Analysis Tool
- IT Department Budget Template
- FREE! Download Exclusive Research From Info-Tech [Registration required]
Although TCO can provide valuable insight into an organization's operational effectiveness, Info-Tech believes sole reliance on TCO can limit management's decision-making function. Used in conjunction with other popular metrics such as ROI or Payback Period, TCO gains much more perspective.
Bottom Line
IT decision makers who understand their TCO are able to calculate the value of their IT investments. IT departments not using TCO to justify spending decisions are doing themselves and the enterprise a disservice. Implement a TCO process to minimize costs over an IT asset's life cycle and improve IT/business alignment.
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George Goodall is a senior research analyst with Info-Tech Research Group. He focuses on enterprise applications, specifically Enterprise Resource Planning (ERP) and Document Management, and has an in-depth understanding of technology research, project management, process development, and vendor selection. Goodall is currently completing a Ph.D. from the Faculty of Information and Media Studies at The University of Western Ontario. He received his Bachelor of Science in Engineering from Queen's University, and his Master of Library and Information Science from The University of Western Ontario.
