Definition – What is Total Cost of Ownership?

Total cost of ownership is the sum of the purchase price of an asset plus operating costs for its lifetime.

A simple example would be the cost of owning a car. You can buy a car, but you will still need to pay license fees and insurance premiums, and it must regularly be serviced. You also need to fill the tank up with gas, and when things go wrong, you have to pay for repairs.

Businesses use total cost of ownership (TCO) when evaluating capital investment. If they want to purchase this new machine or that software package, they will want to know more than just the listed price. It’s logical that they should. Just as a car won’t go without gas and can’t be on the road without a license and insurance, an asset is useless if the running costs can’t be covered or don’t offer sufficient benefits for the price.

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Total Cost of Ownership: IT Products

Although the concept of total cost of ownership has been around since the early twentieth century, it was popularized by the Gartner Group during the eighties. It is particularly relevant in information technology deployment decisions.

The deployment of new technologies or systems can cost businesses a great deal of money. When they consider buying a new computer system or software package, they consider TCO in order to determine whether the improvements offered will outweigh the expense incurred.

Let’s look at the factors that would be considered when new hardware and software are under consideration. What are the costs?

This list only covers getting the new system up and running, but there will be additional costs:

Now that we have looked at the direct and obvious costs, the list of costs is still not complete:

Finally, we may believe we have reached the bottom line, but that’s not so.

Now, we will compare the total of all these costs with the running cost of existing systems or other systems we are considering. We may have to factor in a few extras here. For instance, if we are moving from manual invoicing to software-generated invoices, how much does manual invoicing cost us in labor? This includes the time needed for a bookkeeper to enter the invoices into the company’s accounts and the time needed to correct any errors.

Outsourcing may look like an easier solution

The trend towards outsourcing overcomes many of the unknowns companies face when performing a TCO analysis. For example, we can work in the cloud instead of having a physical server in-house. Cloud providers will usually give us a fixed monthly cost that includes some basic support. We still have a complex calculation to do in order to calculate total cost of ownership, but many of the factors we would ordinarily have to account for have been eliminated.

The same is true of software. Whereas we previously purchased software outright and continued to use it until it was outdated, most software providers have moved towards subscription services. Thus, every time we renew our licenses, we will get the latest version of the software as part of the deal. Since subscription service providers are eager to see us renewing our licenses or continuing as subscribers, they usually offer a suite of additional services that companies would have had to pay for in the past.

Nevertheless, subscription services and service level agreements only simplify the total cost analysis. They do not completely eliminate the need for it. They also imply a very thorough investigation of the service provider.

For example, cloud data services can save us a fortune in hardware, but what happens if that server goes down? What is our prospective service provider’s track record like? Does it have very little downtime and a rapid response time when issues arise? How strong is its cyber-security? Does it back up our data? Does it offer support?

Before we can cross anything off the list of cost factors that go into total cost of ownership, we need to know whether we really are covered.

Factors that Reduce the Total Cost of Subscription Ownership

Ultimately, companies need to take risks whenever they seek improvement. The greater the risk, the higher the potential cost of ownership. No matter how wonderful a new subscription service may look on the surface, we need to do a little fact-checking:

Tallyfy – Use Cloud SaaS to Reduce Total Cost of Ownership

Tallyfy is a workflow engine that has been designed with improving efficiencies firmly in mind. We’re confident that you’ll find little to no risk inherent in adopting our service. On the contrary, the benefits will be far-reaching. Agile businesses live in a world of constant change, adapting constantly. If anything, Tallyfy should reduce the cost of these changes, making them easier and cheaper to implement. But don’t take our word for it – get your free trial and see for yourself!

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