Total cost of ownership
Encyclopedia
Total cost of ownership is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system. It is a management accounting
concept that can be used in full cost accounting
or even ecological economics
where it includes social costs.
, internal rate of return
, economic value added
, return on information technology, and rapid economic justification.
A TCO analysis includes total cost of acquisition
and operating cost
s. A TCO analysis is used to gauge the viability of any capital investment. An enterprise may use it as a product/process comparison tool. It is also used by credit markets and financing agencies. TCO directly relates to an enterprise's asset and/or related systems total costs across all projects and processes, thus giving a picture of the profitability
over time.
in 1987. The roots of this concept date at least back to the first quarter of the twentieth century. Microsoft then embraced the concept and commissioned various white papers and case studies in the late 90s to show that Windows
had a lower TCO than Linux
. Many different methodologies
and software tools have been developed to analyze TCO. TCO tries to quantify the financial impact of deploying an information technology product over its life cycle
. These technologies include software and hardware
, and training.
Technology deployment can include the following as part of TCO:
from the time of purchase by the owner, through its operation and maintenance to the time it leaves the possession of the owner. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget.
Some of the key elements incorporated in the cost of ownership for a vehicle include:
Management accounting
Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control...
concept that can be used in full cost accounting
Full cost accounting
Full cost accounting generally refers to the process of collecting and presenting information - about environmental, social, and economic costs and benefits/advantages - for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct...
or even ecological economics
Ecological economics
Image:Sustainable development.svg|right|The three pillars of sustainability. Clickable.|275px|thumbpoly 138 194 148 219 164 240 182 257 219 277 263 291 261 311 264 331 272 351 283 366 300 383 316 394 287 408 261 417 224 424 182 426 154 423 119 415 87 403 58 385 40 368 24 347 17 328 13 309 16 286 26...
where it includes social costs.
Use of concept
TCO, when incorporated in any financial benefit analysis, provides a cost basis for determining the economic value of an investment. Examples include: return on investmentReturn on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
, internal rate of return
Internal rate of return
The internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
, economic value added
Economic value added
In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
, return on information technology, and rapid economic justification.
A TCO analysis includes total cost of acquisition
Total cost of acquisition
The Total Cost of Acquisition is a managerial accounting concept that includes all the costs associated with buying goods, services, or assets. Generally, it is the net price plus other costs needed to purchase the item and get it to the point of use...
and operating cost
Operating cost
Operating costs can be described as the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.-Business operating costs:...
s. A TCO analysis is used to gauge the viability of any capital investment. An enterprise may use it as a product/process comparison tool. It is also used by credit markets and financing agencies. TCO directly relates to an enterprise's asset and/or related systems total costs across all projects and processes, thus giving a picture of the profitability
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
over time.
Computer and software industries
TCO analysis was popularized by the Gartner GroupGartner
Gartner, Inc. is an information technology research and advisory firm headquartered in Stamford, Connecticut, United States. It was known as GartnerGroup until 2001....
in 1987. The roots of this concept date at least back to the first quarter of the twentieth century. Microsoft then embraced the concept and commissioned various white papers and case studies in the late 90s to show that Windows
Microsoft Windows
Microsoft Windows is a series of operating systems produced by Microsoft.Microsoft introduced an operating environment named Windows on November 20, 1985 as an add-on to MS-DOS in response to the growing interest in graphical user interfaces . Microsoft Windows came to dominate the world's personal...
had a lower TCO than Linux
Linux
Linux is a Unix-like computer operating system assembled under the model of free and open source software development and distribution. The defining component of any Linux system is the Linux kernel, an operating system kernel first released October 5, 1991 by Linus Torvalds...
. Many different methodologies
Methodology
Methodology is generally a guideline for solving a problem, with specificcomponents such as phases, tasks, methods, techniques and tools . It can be defined also as follows:...
and software tools have been developed to analyze TCO. TCO tries to quantify the financial impact of deploying an information technology product over its life cycle
Product life cycle management
Product life-cycle management is the succession of strategies used by business management as a product goes through its life-cycle. The conditions in which a product is sold changes over time and must be managed as it moves through its succession of stages.Product life-cycle Like human beings,...
. These technologies include software and hardware
Hardware
Hardware is a general term for equipment such as keys, locks, hinges, latches, handles, wire, chains, plumbing supplies, tools, utensils, cutlery and machine parts. Household hardware is typically sold in hardware stores....
, and training.
Technology deployment can include the following as part of TCO:
- Computer hardware and programs
- Network hardware and software
- Server hardware and software
- Workstation hardware and software
- Installation and integration of hardware and software
- Purchasing research
- Warranties and licenses
- License tracking - compliance
- MigrationPC migrationPC migration is the process of transferring the entire user environment between two computer systems. The migration problem is often associated with the concept of Total Cost of Ownership where the requirement to migrate information is considered a "cost" in purchasing a new PC, similar...
expenses - Risks: susceptibility to vulnerabilities, availability of upgrades, patches and future licensing policies, etc.
- Operation expenses
- Infrastructure (floor space)
- Electricity (for related equipment, cooling, backup power)
- Testing costs
- Downtime, outage and failure expenses
- Diminished performance (i.e. users having to wait, diminished money-making ability)
- Security (including breaches, loss of reputation, recovery and prevention)
- Backup and recovery process
- Technology training
- Audit (internal and external)
- Insurance
- Information technology personnel
- Corporate managementCorporate titlePublicly and privately held for-profit corporations confer corporate titles or business titles on company officials as a means of identifying their function in the organization...
time
- Long term expenses
- Replacement
- Future upgrade or scalability expenses
- Decommissioning
Transportation industry
The TCO concept is widely used in the transportation industry. For example, the TCO defines the cost of owning an automobileAutomobile
An automobile, autocar, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...
from the time of purchase by the owner, through its operation and maintenance to the time it leaves the possession of the owner. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget.
Some of the key elements incorporated in the cost of ownership for a vehicle include:
- Depreciation costsDepreciationDepreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
- FuelFuelFuel is any material that stores energy that can later be extracted to perform mechanical work in a controlled manner. Most fuels used by humans undergo combustion, a redox reaction in which a combustible substance releases energy after it ignites and reacts with the oxygen in the air...
costs - InsuranceInsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
- Financing
- Repairs
- Fees and taxes
- MaintenanceMaintenance, Repair and OperationsMaintenance, repair, and operations or maintenance, repair, and overhaul involves fixing any sort of mechanical or electrical device should it become out of order or broken...
costs - Opportunity costs
See also
- Cost to company (CTC)
- Activity-based costingActivity-based costingActivity-based costing is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each...
- Life cycle cost analysisLife cycle cost analysisLife cycle cost analysis may refer to:* Life cycle assessment, the investigation and valuation of the environmental impacts of a given product or service caused or necessitated by its existence...
- Total benefits of ownershipTotal benefits of ownershipTotal benefits of ownership is a calculation that tries to summarize the positive effects of acquisition of new computer components. These effects might be increases in high-value work, improvements in accuracy and efficiency, improvements in decision-making or improvements in customer service....
- Total costTotal costIn economics, and cost accounting, total cost describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a...
- Total cost of acquisitionTotal cost of acquisitionThe Total Cost of Acquisition is a managerial accounting concept that includes all the costs associated with buying goods, services, or assets. Generally, it is the net price plus other costs needed to purchase the item and get it to the point of use...
External links
- JATO - JATO DynamicsJATO DynamicsJATO Dynamics Ltd is a supplier of automotive intelligence founded in England in 1984. Its Global Headquarters are in Harrow, London, UK with offices in Australia, Brazil, China, France, Germany, Greece, Italy, Japan, Mexico, Spain, the Netherlands and USA....
(Transportation) - Vincentric (Transportation)
- Driverside.com (Transportation)
- Edmunds.com (Transportation)
- TCO in Glomark-Governan Economic Value Creation Methodology
- Gartner Applied Methodology Total Cost of Ownership (TCO) Center
- TCO-Tool to calculate TCO costs (open source)
- data integration: TCO really matters