Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and
indirect costs Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Like direct costs, indirect costs may be either fixed or variable. Indirect costs include administration, pers ...
of a product or service. It is a
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
concept that can be used in
full cost accounting Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical Cost-benefit analysis, c ...
or even
ecological economics where it includes
social cost
Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...
s.
For manufacturing, as TCO is typically compared with doing business overseas, it goes beyond the initial manufacturing cycle time and cost to make parts. TCO includes a variety of cost of doing business items, for example, ship and re-ship, and opportunity costs, while it also considers incentives developed for an alternative approach. Incentives and other variables include tax credits, common language, expedited delivery, and customer-oriented supplier visits.
Use of concept
TCO, when incorporated in any financial benefit analysis, provides a cost basis for determining the total economic value of an investment. Examples include:
return on investment
Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably ...
,
internal rate of return
Internal rate of return (IRR) is a method of calculating an investment’s rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or fin ...
,
economic value added, return on information technology, and rapid economic justification.
A TCO analysis includes
total cost of acquisition Total cost of acquisition (TCA) 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 o ...
and
operating cost
Operating costs or operational costs, are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to main ...
s, as well as costs related to replacement or upgrades at the end of the life cycle. A TCO analysis is used to gauge the viability of any
capital investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
. An enterprise may use it as a product/process comparison tool. It is also used by
credit market
The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
s and
financing
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
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
In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs.
It i ...
over time.
Computer and software industries
TCO analysis was popularized by the
Gartner Group
Gartner, Inc is a technological research and consulting firm based in Stamford, Connecticut that conducts research on technology and shares this research both through private consulting as well as executive programs and conferences. Its clients ...
in 1987. The roots of this concept date at least back to the first quarter of the twentieth century. Many different
methodologies
In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...
and software tools have been developed to analyze TCO in various operational contexts.
TCO is applied to the analysis of information technology products, seeking to quantify the financial impact of deploying a product over its
life cycle
Life cycle, life-cycle, or lifecycle may refer to:
Science and academia
*Biological life cycle, the sequence of life stages that an organism undergoes from birth to reproduction ending with the production of the offspring
*Life-cycle hypothesis, ...
. These technologies include
software
Software is a set of computer programs and associated documentation and data. This is in contrast to hardware, from which the system is built and which actually performs the work.
At the lowest programming level, executable code consists ...
and hardware, 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
**
Migration
Migration, migratory, or migrate may refer to: Human migration
* Human migration, physical movement by humans from one region to another
** International migration, when peoples cross state boundaries and stay in the host state for some minimum le ...
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/user training
** Audit (internal and external)
** Insurance
** Information technology personnel
**
Corporate management
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business.
Management includes the activities o ...
time
*Long term expenses
** Replacement
** Future upgrade or scalability expenses
** Decommissioning
In the case of comparing TCO of existing versus proposed solutions, consideration should be put toward costs required to maintain the existing solution that may not necessarily be required for a proposed solution. Examples include cost of manual processing that are only required to support lack of existing automation, and extended support personnel.
Facilities and built environment
Total cost of ownership can be applied to the structure and systems of a single building or a campus of buildings. Pioneered by Doug Christensen and the facilities department at
Brigham Young University
Brigham Young University (BYU, sometimes referred to colloquially as The Y) is a private research university in Provo, Utah. It was founded in 1875 by religious leader Brigham Young and is sponsored by the Church of Jesus Christ of Latter-day ...
starting in the 1980s, the concept gained more traction in educational facilities in the early 21st century.
The application of TCO in facilities goes beyond the predictive cost analysis for a new building’s “first cost” (planning, construction and commissioning), to factor in a variety of critical requirements and costs over the life of the building:
* replacement of energy, utility, and safety systems;
* continual maintenance of the building exterior and interior and replacement of materials;
* updates to design and functionality;
* and recapitalization costs.
A key objective of planning, constructing, operating, and managing buildings via TCO principals is for building owners and facility professionals to predict needs and deliver data-driven results. TCO can be applied any time during the life of a facility asset to manage cost inputs for the life of the structure or system into the future.
Developing standards for TCO in facilities
APPA, an
ANSI
The American National Standards Institute (ANSI ) is a private non-profit organization that oversees the development of voluntary consensus standards for products, services, processes, systems, and personnel in the United States. The organi ...
Accredited Standards Developer, published ''APPA 1000-1 – Total Cost of Ownership for Facilities Asset Management (TCO) – Part 1: Key Principles'' as an
American National Standard
The American National Standards Institute (ANSI ) is a private non-profit organization that oversees the development of voluntary consensus standards for products, services, processes, systems, and personnel in the United States. The organi ...
in December 2017.
APPA 1000-1 provides financial officers, facility professionals, architects, planners, construction workforce, and operations and maintenance (O&M) personnel the foundation of a standardized and holistic approach to implementing TCO key principles. Implementation of TCO key principles can improve decision making, maximizing financial strategies over the life of an asset, starting at the planning and design stage and extends to the end of the asset's life.
APPA 1000-2, slated for publication in 2019, will focus on implementation and application of key TCO principals in facility management.
Transportation
The TCO concept is easily applicable to the
transportation
Transport (in British English), or transportation (in American English), is the intentional movement of humans, animals, and goods from one location to another. Modes of transport include air, land (rail and road), water, cable, pipeline, ...
industry and to motor vehicle ownership, for example, the TCO defines the cost of owning an
automobile
A car or automobile is a motor vehicle with Wheel, wheels. Most definitions of ''cars'' say that they run primarily on roads, Car seat, seat one to eight people, have four wheels, and mainly transport private transport#Personal transport, pe ...
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:
[Bartlett, J.]
The Cost of Car Ownership Over Time
updated 1 April 2020, accessed 28 January 2021
*
Depreciation costs
*
Fuel
A fuel is any material that can be made to react with other substances so that it releases energy as thermal energy or to be used for work. The concept was originally applied solely to those materials capable of releasing chemical energy but ...
costs
*
Insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
*
Financing
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
*
Repairs
The technical meaning of maintenance involves functional checks, servicing, repairing or replacing of necessary devices, equipment, machinery, building infrastructure, and supporting utilities in industrial, business, and residential installa ...
* Fees and taxes
*
Maintenance
Maintenance may refer to:
Biological science
* Maintenance of an organism
* Maintenance respiration
Non-technical maintenance
* Alimony, also called ''maintenance'' in British English
* Champerty and maintenance, two related legal doctrine ...
costs
*
Opportunity costs
In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
*
Downtime
The term downtime is used to refer to periods when a system is unavailable.
The unavailability is the proportion of a time-span that a system is unavailable or offline.
This is usually a result of the system failing to function because of an un ...
costs.
See also
*
Cost to company (CTC)
*
Capital expenditure
Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
(CAPEX)
*
Operating expense
An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provid ...
(OPEX)
*
Activity-based costing
Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more ind ...
*
Life cycle cost analysis
*
Total benefits of ownership
*
Total cost
In economics, total cost (TC) is the minimum dollar cost of producing some quantity of output. This is the total economic cost of production and is made up of variable cost, which varies according to the quantity of a good produced and includes ...
*
Total cost of acquisition Total cost of acquisition (TCA) 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 o ...
*
Vendor lock-in
In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products, unable to use another vendor without substantial switching costs.
The use of open standards and alternative ...
References
{{DEFAULTSORT:Total Cost Of Ownership
Costs
Enterprise application integration
Information technology governance
fr:Coût total de possession