Total Cost of Ownership

What Is Total Cost of Ownership?

Total cost of ownership, also referred to as TCO, is the calculation of how much an item, process, or service costs over its lifetime. These may include costs for setup, disposal, updates and upgrades, resources used, and more. TCO can vary greatly depending on what the item is and how it is being measured. Other factors like item maintenance, lifespan, and repairs also play an important role in TCO.

Why Is Total Cost of Ownership Important?

TCO is crucial for organizations to measure in order to determine the true value and cost of the purchased resources. Cost is hardly ever entirely straightforward, especially for business expenses. TCO helps organizations to determine if a purchased resource is worth what is being paid for it. It is important to note that TCO includes any maintenance or repair work as well as the cost to dispose of a resource; otherwise, the total cost would not be accurate.

Once an organization has the full picture of how much a resource truly costs, in addition to the cost of the original purchase, it can determine if the payoff is worth what is being paid over time.

Should I Be Trying to Decrease TCO?

It seems like a valid question with an easy answer. Should I be trying to decrease the TCO of a certain item? The answer isn’t always straightforward. The cost of a purchased resource isn’t a bad thing. In fact, it is a valuable tool to help determine the cost, especially in comparison to the value brought.

As a reminder, TCO does not encompass the total value that a resource brings to your organization; this is only to measure the costs associated with purchasing, maintaining, and eventually disposing of an item. An item with a higher TCO does not equate to more value brought to the organization. In the same vein, an item with a low TCO does not mean that the resource isn’t valuable.

It is incredibly important NOT to disregard costs associated with purchased resources to make it seem as though the TCO is less than it really is. TCO assists organizations in making good financial decisions, and under- or overreporting the TCO of a resource does not help determine cost per use or other metrics to determine if a resource will continue to be used.

Learn More

To learn more about TCO and other business-related resources, visit ICG’s Learning Center.

Posts you might like:

How to Reduce Cost Per Invoice with ICG’s Solutions

Every invoice your accounts payable team touches has a price attached to it. And while that's literally true, considering the invoice needs to be paid, your organization also pays for the labor involved in invoice processing. While there isn't a specific amount for...

What to Look for in a Data & Document Capture Solution

The financial back office runs on documents and data. Yet these same documents and data are often the cause of bottlenecks, especially if they are entered manually into disconnected spreadsheets. This has a high potential for errors as well as increases in operational...

Seamless ERP Integration for Supplier Onboarding

In the financial back office, onboarding a new vendor is rarely simple. Between collecting tax documents, verifying banking details, validating compliance certifications, and running risk checks, the onboarding process often takes weeks. When vendor onboarding...

Driving Retail Success in the Back Office

In retail, it's easy to assume growth comes only from the front end; however, a great front-end experience depends on a strong back office. As the retail industry grows and becomes more complex, a strong back office matters more than ever. These are the most impactful...

Fixing Back-Office Exception Bottlenecks in C-Stores

Convenience store chains process thousands of micro-transactions weekly. When an exception occurs, whether it's an unapproved price hike on a delivery, a missing receiver, or a line-item mismatch, large portions of the back...

How Does Invoice Volume Affect Back Office Performance?

As a business scales, increasing revenue naturally drives a surge in transactional volume across finance and operations. While higher volumes of incoming and outgoing invoices reflect positive growth, it can also introduce critical stress points into your back-office...

The Key to Managing Your Vendors Better

For many enterprises, vendors are the backbone of day-to-day operations. But with manual packet processing, untracked compliance expirations, and fragmented communication channels, unnecessary friction around vendors can run rampant. This can expose your supply chain...

Procurement Best Practices

In the ideal enterprise, the financial back office operates smoothly, operations scale effortlessly, supplier relationships thrive, and cash flow stays predictable. But when back-office procurement relies on manual invoice matching and disconnected emails or...

Why the Back Office Needs Specialized Exception Processing

ERPs record transactions, manage general ledgers, keep inventory aligned, and handle financial workflows. When your transactions follow the perfect path, your ERP operates like a well-oiled machine. However, the real world rarely fits neatly into rigid database rules....

Maximizing Efficiency in the Back Office

From Accounts Payable and procurement to vendor management and financial compliance, back-office processes dictate how fast an enterprise can scale. These functions easily slow down through manual data entry and fragmented workflows. Here is how enterprises are...