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. 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 that are associated with purchased resources in order 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 is not helpful in determining 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.