Total cost of ownership (TCO) is the full cost of an asset, including acquisition, maintenance, repairs, and associated costs. TCO is commonly used in the automotive and technology industries, and individuals should analyze TCO for major purchases. TCO for information technology can be up to four times the initial cost, and associated costs such as security breaches and virus vulnerability should be considered. Professional companies can do TCO analysis for a fee, and individuals should research purchases thoroughly.
Total cost of ownership (TCO) is a way of looking at the full cost of an asset, including initial acquisition, maintenance, required training, repairs, and other associated costs. The concept of TCO began to be widely used in the financial world in the late 1980s, when new technologies were rapidly developing and it was sometimes difficult for companies to understand the value of their assets. TCO commonly appears in the automotive and technology industries, where consumers are encouraged to weigh the TCO of the products they purchase.
TCO starts with the initial cost for the business, including taxes and fees. Hence, the costs associated with the activity must also be taken into consideration. In the example of a car, the vehicle will require insurance, regular maintenance, fuel and repairs. The prospective buyer could weigh the cost of an economy car versus expensive repairs or vice versa and determine which choice is more practical. While they are most commonly used by large companies, individuals may be well served by analyzing the TCO of major life purchases such as computers, cars and homes.
In the case of information technology, the TCO is sometimes estimated to be up to four times the cost of the initial computer, which can be especially devastating in office environments where large and expensive computer systems are purchased. The TCO for a computer includes hardware and software upgrades, technical support, database maintenance, training and maintenance, especially in large companies where staff members specialize in maintaining computer equipment. Often these factors are not taken into consideration when first estimating the cost of a new computer system and this can have disastrous results when dealing with a limited budget.
TCO can also look at associated costs, some of which may be more intangible. For example, a company that manages secure data typically considers the cost of security breaches and failures. In addition to being an expensive data recovery process, security breaches can also lead to a serious lack of trust in the company, which can lead to lost customers. Virus vulnerability is also a concern, with potential data loss from viruses being a large part of the total cost of ownership.
When considering a major investment, it’s important to consider the TCO so that there are no unpleasant surprises associated with the new acquisition. There are a number of professional companies that do TCO analysis for a small fee, and this route is recommended for companies making large investments. For individuals, new purchases should be researched thoroughly before committing.
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