Total Cost of Ownership (TCO) - Revision history

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User: Total cost of ownership (TCO) is a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time.

2018-12-11T21:29:40Z

Total cost of ownership (TCO) is a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time.

New page

Total cost of ownership (TCO)is a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.<ref>Defining Total Cost of Ownership (TCO) [http://www.gartner.com/it-glossary/total-cost-of-ownership-tco/ Gartner]</ref>

'''Total Cost of Ownership Formula''' 
The TCO Calculator is designed to help people who are new to the concept of total cost of ownership.

It may not be particularly useful to those who are experienced and/or qualified in accounting or related disciplines - it is recommended that these people continue to use their current methodology, or seek more sophisticated software.

The calculator contains a number of categories and sub-categories of costs associated with the life-cycle of an item. Some of these are obvious, like the purchase cost of the item, but some are things that you might not have thought of, such as the cost of outages. The calculator is designed to prompt you to think about costs that you may not have thought of, but you only need to enter data into the fields that apply to the product that you are procuring.

"The TCO Calculator will automatically calculate:
* an overall Total Cost of Ownership
* totals for the various sections, categories and sub-categories, and
* percentages of the TCO for each of the categories." <ref>Calculating TTotal Cost of Ownerhip [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/total-cost-ownership-calculator.xlsx govt.nz]</ref>

Click for a [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/total-cost-ownership-calculator.xlsx Total Cost of Ownership Calculator]

'''Total Cost of Ownership Model''' 
The concept of the Total Cost of Ownership (TCO) is not new and for many not a bit exciting. But, it is a critical part of the acquisition process and has been successfully used for the analysis of Information Technology and government procured products for many years. It is a mainstay of the [[Federal_Acquisition_Regulations_(FAR)|Federal Acquisition Regulations (FAR)]]. Yet, the concept of the Total Cost of Ownership hasn’t been universally adopted by middle market manufacturing and distribution companies as part of their standard [[Supply_Chain_Management|Supply Chain Management]] Solutions.

Middle market companies don’t typically have sophisticated procurement systems and in most cases don’t have the systems and metrics to develop a Total Cost of Ownership model. Purchase price, shipping and delivery dates are what most buyers are interested in. They might pay attention to a vendor that is particularly bad, but don’t have the ability to define and measure the nuances of cost. This failure to do so can consume significant amounts of operating profit over the lifecycle of a product or a component. In some cases, purchase price can be as little as 20% of the Total Cost of Ownership.<ref>How do Total Cost of Ownership Models Affect your Business [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]</ref>

Utilizing the Total Cost of Ownership model requires a process that once defined isn’t difficult to maintain. As illustrated in the figure below it consists of 5 primary buckets of cost and their corresponding cost factors.

[[File:Total-Cost-of-Ownership-Model.png|400px|Total Cost of Ownership Model]] 
source: [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]

'''Total Cost of Ownership Example''' 
The cost model (above) provides the total cost of ownership analyst with a list of cost items—the contents of all the model cells. The analyst must then estimate cost figures for each item, for each scenario under consideration, for each year covered by the analysis

Here, for example, are one analyst's estimates for just one cost item (Server System Purchase): 
[[File:Tco_example.png|400px|Total Cost of Ownership Example]] 
source: [https://www.business-case-analysis.com/total-cost-of-ownership.html Solution Matrix Ltd.]

The TCO analyst must make six cost estimates for one cost item ("Server system purchase") when the TCO study includes two scenarios (Business as Usual and Proposal"), over a three-year ownership life. The three incremental cash flow estimates are then determined automtatically as "Proposal Estimate - Business as Usual Estimate" for each year.

Methods for making these estimates are beyond the scope of this encyclopedia entry, but briefly, the analyst will base these figures on several kinds of information. For the IT example, the analyst will forecast cost drivers for each item, under each scenario, (for example, numbers of users, transaction volume, storage space requirements, and so on). The analyst will also base the estimates on vendor-provided information, experience with similar systems in other settings, and industry standards and guidelines.

With cost categories and cost items from the cost model, the analyst can build the primary analytic tools in the TCO study: cash flow statements for each scenario.<ref>How do cash flow estimates build the total cost of ownership result? [https://www.business-case-analysis.com/total-cost-of-ownership.html BCA]</ref>

'''Total Cost of Ownership in Procurement'''<ref>Total Cost of Ownership in Procurement [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/guide-total-cost-ownership.pdf|Guide to Total Cost of Ownership]</ref> 
TCO can be used at various stages in procurement: 
*in a business case to assess the costs, benefits and risks associated with the investment
*when assessing different business models, maintenance options or solutions on a comparable cost basis
*to understand the different cost drivers in the life of a procurement
*by a supplier when bidding for a contract to demonstrate the total benefits and value being offered – especially where the initial purchase price is higher than competitors, but the total cost of ownership is lower
*in selecting the best supplier by assessing the comparative whole-of-life costs of competing bids
*in managing the contract to track actual expenses and income against budget
*as part of a benefits realization exercise.

===References===
<references />

@@ Line 1: / Line 1: @@
-== Total Cost of Ownership Formula<ref>Calculating Total Cost of Ownerhip [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/total-cost-ownership-calculator.xlsx govt.nz]</ref> ==
+It may not be particularly useful to those who are experienced and/or qualified in accounting or related disciplines - it is recommended that these people continue to use their current methodology, or seek more sophisticated software.
-It may not be particularly useful to those who are experienced and/or qualified in [[accounting]] or related disciplines - it is recommended that these people continue to use their current [[methodology]], or seek more sophisticated software.
+The calculator contains a number of categories and sub-categories of costs associated with the life cycle of an item.  Some of these are obvious, like the purchase cost of the item, but some are things that you might not have thought of, such as the cost of outages.  The calculator is designed to prompt you to think about costs that you may not have thought of, but you only need to enter data into the fields that apply to the product that you are procuring.
 "The TCO Calculator will automatically calculate:
@@ Line 19: / Line 18: @@
-== Total Cost of Ownership Model<ref>How do Total Cost of Ownership Models Affect your Business [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]</ref> ==
+== Total Cost of Ownership Model<ref>[https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ How does Total Cost of Ownership Model Affect your Business]</ref> ==
-The concept of the Total Cost of Ownership (TCO) is not new and for many not a bit exciting. But, it is a critical part of the acquisition [[process]] and has been successfully used for the analysis of Information Technology and government procured products for many years. It is a mainstay of the [[Federal Acquisition Regulations (FAR)]]. Yet, the concept of the Total Cost of Ownership hasn’t been universally adopted by middle [[market]] [[manufacturing]] and [[distribution]] companies as part of their [[standard]] [[Supply Chain Management (SCM)]] Solutions.
+The concept of the Total Cost of Ownership (TCO) is not new and for many not a bit exciting. But, it is a critical part of the acquisition process and has been successfully used for the analysis of Information Technology and government-procured products for many years. It is a mainstay of the Federal Acquisition Regulations (FAR). Yet, the concept of the Total Cost of Ownership hasn’t been universally adopted by middle-market manufacturing and distribution companies as part of their standard Supply Chain Management (SCM) Solutions.
-Middle market companies don’t typically have sophisticated [[procurement]] systems and in most cases don’t have the systems and [[metrics]] to develop a Total Cost of Ownership [[model]]. Purchase [[price]], shipping and delivery dates are what most buyers are interested in. They might pay attention to a [[vendor]] that is particularly bad, but don’t have the ability to define and measure the nuances of cost. This failure to do so can consume significant amounts of operating [[profit]] over the lifecycle of a product or a component. In some cases, purchase price can be as little as 20% of the Total Cost of Ownership.
+Middle-market companies don’t typically have sophisticated procurement systems and in most cases don’t have the systems and metrics to develop a Total Cost of Ownership model. The purchase price, shipping, and delivery dates are what most buyers are interested in. They might pay attention to a vendor that is particularly bad but doesn’t have the ability to define and measure the nuances of cost. This failure to do so can consume significant amounts of operating profit over the lifecycle of a product or a component. In some cases, the purchase price can be as little as 20% of the Total Cost of Ownership.
 Utilizing the Total Cost of Ownership model requires a process that once defined isn’t difficult to maintain. As illustrated in the figure below it consists of 5 primary buckets of cost and their corresponding cost factors.
@@ Line 28: / Line 27: @@
 [[File:Total-Cost-of-Ownership-Model.png|400px|Total Cost of Ownership Model]]<br />
-source: [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]
+source: Group50
-== Total Cost of Ownership Example<ref>How do cash flow estimates build the total cost of ownership result? [https://www.business-case-analysis.com/total-cost-of-ownership.html BCA]</ref> ==
+== Total Cost of Ownership Example<ref>[https://www.business-case-analysis.com/total-cost-of-ownership.html How does cash flow estimate build the total cost of ownership result?]</ref> ==
 The cost model (above) provides the total cost of ownership analyst with a list of cost items—the contents of all the model cells. The analyst must then estimate cost figures for each item, for each scenario under consideration, for each year covered by the analysis
-Here, for example, are one analyst's estimates for just one cost item ([[Server]] [[System]] Purchase):<br />
+Here, for example, are one analyst's estimates for just one cost item (Server System Purchase):<br />
 [[File:Tco_example.png|400px|Total Cost of Ownership Example]]<br />
-source: [https://www.business-case-analysis.com/total-cost-of-ownership.html Solution Matrix Ltd.]
+source: Matrix Ltd.
-The TCO analyst must make six cost estimates for one cost item ("Server system purchase") when the TCO study includes two scenarios ([[Business]] as Usual and Proposal"), over a three-year ownership life. The three incremental cash flow estimates are then determined automtatically as "Proposal Estimate - Business as Usual Estimate" for each year.
+The TCO analyst must make six cost estimates for one cost item ("Server system purchase") when the TCO study includes two scenarios (Business as Usual and Proposal"), over a three-year ownership life. The three incremental cash flow estimates are then determined automatically as "Proposal Estimate - Business as Usual Estimate" for each year.
-Methods for making these estimates are beyond the scope of this encyclopedia entry, but briefly, the analyst will base these figures on several kinds of information. For the IT example, the analyst will forecast cost drivers for each item, under each scenario, (for example, numbers of users, transaction volume, storage space requirements, and so on). The analyst will also base the estimates on vendor-provided information, experience with similar systems in other settings, and [[industry]] standards and guidelines.
+Methods for making these estimates are beyond the scope of this encyclopedia entry, but briefly, the analyst will base these figures on several kinds of information. For the IT example, the analyst will forecast cost drivers for each item, under each scenario, (for example, number of users, transaction volume, storage space requirements, and so on). The analyst will also base the estimates on vendor-provided information, experience with similar systems in other settings, and industry standards and guidelines.
 With cost categories and cost items from the cost model, the analyst can build the primary analytic tools in the TCO study: cash flow statements for each scenario.
-== Total Cost of Ownership in Procurement<ref>Total Cost of Ownership in Procurement [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/guide-total-cost-ownership.pdf|Guide to Total Cost of Ownership]</ref> ==
+== Total Cost of Ownership in Procurement<ref>[http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/guide-total-cost-ownership.pdf Guide to Total Cost of Ownership]</ref> ==
-TCO can be used at various stages in procurement: <br />
+TCO can be used at various stages in procurement:
-*in a business case to assess the costs, benefits and risks associated with the investment
+*in a business case to assess the costs, benefits, and risks associated with the investment
-*when assessing different business models, maintenance options or solutions on a comparable cost basis
+*when assessing different business models, maintenance options, or solutions on a comparable cost basis
 *to understand the different cost drivers in the life of a procurement
-*by a [[supplier]] when bidding for a contract to demonstrate the total benefits and [[value]] being offered – especially where the initial purchase price is higher than competitors, but the total cost of ownership is lower
+*by a supplier when bidding for a contract to demonstrate the total benefits and value being offered – especially where the initial purchase price is higher than competitors, but the total cost of ownership is lower
 *in selecting the best supplier by assessing the comparative whole-of-life costs of competing bids
-*in managing the contract to track actual expenses and income against [[budget]]
+*in managing the contract to track actual expenses and income against budget
 *as part of a benefits realization exercise.
@@ Line 63: / Line 62: @@
 *[[Federal IT Acquisition Reform Act (FITARA)]]
 *[[IT Cost Allocation]]
-===References===
+== References ==
 <references />

@@ Line 58: / Line 58: @@
 == See Also ==
-[[IT Financial Management (ITFM)]]<br />
+*[[IT Financial Management (ITFM)]]
-[[Technology Business Management (TBM)]]<br />
+*[[Technology Business Management (TBM)]]
-[[IT Chargeback]]<br />
+*[[IT Chargeback]]
-[[IT Cost Optimization]]<br />
+*[[Federal IT Acquisition Reform Act (FITARA)]]
-[[Federal IT Acquisition Reform Act (FITARA)]]<br />
+*[[IT Cost Allocation]]
 ===References===
 <references />

@@ Line 1: / Line 1: @@
 == Definition - What is Total Cost of Ownership (TCO)? <ref>Defining Total Cost of Ownership (TCO) [http://www.gartner.com/it-glossary/total-cost-of-ownership-tco/ Gartner]</ref> ==
-Total cost of ownership (TCO)is  a comprehensive assessment of [[Information Technology (IT)|information technology (IT)]] or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.
+Total cost of ownership (TCO)is  a comprehensive assessment of [[Information Technology (IT)|information technology (IT)]] or other costs across enterprise boundaries over time. For IT, TCO includes [[hardware]] and [[software]] [[acquisition]], [[management]] and support, communications, end-user expenses and the opportunity cost of downtime, training and other [[productivity]] losses.
@@ Line 7: / Line 7: @@
 The TCO Calculator is designed to help people who are new to the concept of total cost of ownership.
-It may not be particularly useful to those who are experienced and/or qualified in accounting or related disciplines - it is recommended that these people continue to use their current methodology, or seek more sophisticated software.
+It may not be particularly useful to those who are experienced and/or qualified in [[accounting]] or related disciplines - it is recommended that these people continue to use their current [[methodology]], or seek more sophisticated software.
-The calculator contains a number of categories and sub-categories of costs associated with the life-cycle of an item.  Some of these are obvious, like the purchase cost of the item, but some are things that you might not have thought of, such as the cost of outages.  The calculator is designed to prompt you to think about costs that you may not have thought of, but you only need to enter data into the fields that apply to the product that you are procuring.
+The calculator contains a number of categories and sub-categories of costs associated with the life-cycle of an item.  Some of these are obvious, like the purchase cost of the item, but some are things that you might not have thought of, such as the cost of outages.  The calculator is designed to prompt you to think about costs that you may not have thought of, but you only need to enter [[data]] into the fields that apply to the [[product]] that you are procuring.
 "The TCO Calculator will automatically calculate:
@@ Line 20: / Line 20: @@
 == Total Cost of Ownership Model<ref>How do Total Cost of Ownership Models Affect your Business [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]</ref> ==
-The concept of the Total Cost of Ownership (TCO) is not new and for many not a bit exciting. But, it is a critical part of the acquisition process and has been successfully used for the analysis of Information Technology and government procured products for many years. It is a mainstay of the [[Federal Acquisition Regulations (FAR)]]. Yet, the concept of the Total Cost of Ownership hasn’t been universally adopted by middle market manufacturing and distribution companies as part of their standard [[Supply Chain Management (SCM)]] Solutions.
+The concept of the Total Cost of Ownership (TCO) is not new and for many not a bit exciting. But, it is a critical part of the acquisition [[process]] and has been successfully used for the analysis of Information Technology and government procured products for many years. It is a mainstay of the [[Federal Acquisition Regulations (FAR)]]. Yet, the concept of the Total Cost of Ownership hasn’t been universally adopted by middle [[market]] [[manufacturing]] and [[distribution]] companies as part of their [[standard]] [[Supply Chain Management (SCM)]] Solutions.
-Middle market companies don’t typically have sophisticated procurement systems and in most cases don’t have the systems and metrics to develop a Total Cost of Ownership model. Purchase price, shipping and delivery dates are what most buyers are interested in. They might pay attention to a vendor that is particularly bad, but don’t have the ability to define and measure the nuances of cost. This failure to do so can consume significant amounts of operating profit over the lifecycle of a product or a component. In some cases, purchase price can be as little as 20% of the Total Cost of Ownership.
+Middle market companies don’t typically have sophisticated [[procurement]] systems and in most cases don’t have the systems and [[metrics]] to develop a Total Cost of Ownership [[model]]. Purchase [[price]], shipping and delivery dates are what most buyers are interested in. They might pay attention to a [[vendor]] that is particularly bad, but don’t have the ability to define and measure the nuances of cost. This failure to do so can consume significant amounts of operating [[profit]] over the lifecycle of a product or a component. In some cases, purchase price can be as little as 20% of the Total Cost of Ownership.
 Utilizing the Total Cost of Ownership model requires a process that once defined isn’t difficult to maintain. As illustrated in the figure below it consists of 5 primary buckets of cost and their corresponding cost factors.
@@ Line 34: / Line 34: @@
 The cost model (above) provides the total cost of ownership analyst with a list of cost items—the contents of all the model cells. The analyst must then estimate cost figures for each item, for each scenario under consideration, for each year covered by the analysis
-Here, for example, are one analyst's estimates for just one cost item (Server System Purchase):<br />
+Here, for example, are one analyst's estimates for just one cost item ([[Server]] [[System]] Purchase):<br />
 [[File:Tco_example.png|400px|Total Cost of Ownership Example]]<br />
 source: [https://www.business-case-analysis.com/total-cost-of-ownership.html Solution Matrix Ltd.]
-The TCO analyst must make six cost estimates for one cost item ("Server system purchase") when the TCO study includes two scenarios (Business as Usual and Proposal"), over a three-year ownership life. The three incremental cash flow estimates are then determined automtatically as "Proposal Estimate - Business as Usual Estimate" for each year.
+The TCO analyst must make six cost estimates for one cost item ("Server system purchase") when the TCO study includes two scenarios ([[Business]] as Usual and Proposal"), over a three-year ownership life. The three incremental cash flow estimates are then determined automtatically as "Proposal Estimate - Business as Usual Estimate" for each year.
-Methods for making these estimates are beyond the scope of this encyclopedia entry, but briefly, the analyst will base these figures on several kinds of information. For the IT example, the analyst will forecast cost drivers for each item, under each scenario, (for example, numbers of users, transaction volume, storage space requirements, and so on). The analyst will also base the estimates on vendor-provided information, experience with similar systems in other settings, and industry standards and guidelines.
+Methods for making these estimates are beyond the scope of this encyclopedia entry, but briefly, the analyst will base these figures on several kinds of information. For the IT example, the analyst will forecast cost drivers for each item, under each scenario, (for example, numbers of users, transaction volume, storage space requirements, and so on). The analyst will also base the estimates on vendor-provided information, experience with similar systems in other settings, and [[industry]] standards and guidelines.
 With cost categories and cost items from the cost model, the analyst can build the primary analytic tools in the TCO study: cash flow statements for each scenario.
@@ Line 51: / Line 51: @@
 *when assessing different business models, maintenance options or solutions on a comparable cost basis
 *to understand the different cost drivers in the life of a procurement
-*by a supplier when bidding for a contract to demonstrate the total benefits and value being offered – especially where the initial purchase price is higher than competitors, but the total cost of ownership is lower
+*by a [[supplier]] when bidding for a contract to demonstrate the total benefits and [[value]] being offered – especially where the initial purchase price is higher than competitors, but the total cost of ownership is lower
 *in selecting the best supplier by assessing the comparative whole-of-life costs of competing bids
-*in managing the contract to track actual expenses and income against budget
+*in managing the contract to track actual expenses and income against [[budget]]
 *as part of a benefits realization exercise.

@@ Line 29: / Line 29: @@
 [[File:Total-Cost-of-Ownership-Model.png|400px|Total Cost of Ownership Model]]<br />
 source: [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]
 == Total Cost of Ownership Example<ref>How do cash flow estimates build the total cost of ownership result? [https://www.business-case-analysis.com/total-cost-of-ownership.html BCA]</ref> ==

@@ Line 19: / Line 19: @@
-== Total Cost of Ownership Model<ref>Total Cost of Ownership Model [<ref>How do Total Cost of Ownership Models Affect your Business [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]</ref> ==
+== Total Cost of Ownership Model<ref>How do Total Cost of Ownership Models Affect your Business [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]</ref> ==
 The concept of the Total Cost of Ownership (TCO) is not new and for many not a bit exciting. But, it is a critical part of the acquisition process and has been successfully used for the analysis of Information Technology and government procured products for many years. It is a mainstay of the [[Federal Acquisition Regulations (FAR)]]. Yet, the concept of the Total Cost of Ownership hasn’t been universally adopted by middle market manufacturing and distribution companies as part of their standard [[Supply Chain Management (SCM)]] Solutions.
@@ Line 29: / Line 29: @@
 [[File:Total-Cost-of-Ownership-Model.png|400px|Total Cost of Ownership Model]]<br />
 source: [https://www.group50.com/how-do-total-cost-of-ownership-models-affect-your-business/ Group50]
 == Total Cost of Ownership Example<ref>How do cash flow estimates build the total cost of ownership result? [https://www.business-case-analysis.com/total-cost-of-ownership.html BCA]</ref> ==

← Older revision		Revision as of 13:18, 22 August 2019
Line 1:		Line 1:
−	Total cost of ownership (TCO)is a comprehensive assessment of [[Information Technology (IT)\|information technology (IT)]] or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.<ref>Defining Total Cost of Ownership (TCO) [http://www.gartner.com/it-glossary/total-cost-of-ownership-tco/ Gartner]</ref>

		+	== Definition - What is Total Cost of Ownership (TCO)? <ref>Defining Total Cost of Ownership (TCO) [http://www.gartner.com/it-glossary/total-cost-of-ownership-tco/ Gartner]</ref> ==
		+	Total cost of ownership (TCO)is a comprehensive assessment of [[Information Technology (IT)\|information technology (IT)]] or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.

	== Total Cost of Ownership Formula<ref>Calculating Total Cost of Ownerhip [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/total-cost-ownership-calculator.xlsx govt.nz]</ref> ==		== Total Cost of Ownership Formula<ref>Calculating Total Cost of Ownerhip [http://www.business.govt.nz/procurement/pdf-library/agencies/guides-and-tools/total-cost-ownership-calculator.xlsx govt.nz]</ref> ==