Popularized by the Gartner Group, TCO (Total cost of ownership) analysis is the industry-standard way of assessing the IT costs for your business. The need of such assessment comes from (in most of the cases) tangible difference between the purchase price and the actual ownership cost.

What is TCO?

Simply speaking, asset ownership is accompanied by numerous costs, going quite beyond the initial purchase price you are willing to pay. TCO analysis is meant to reveal those exact costs, that frequently remain hidden in the initial negotiating process. Correct overall analysis is what leads to correctly made purchase decisions and lack of unpleasant surprises later on in the software lifecycle.

Why TCO matters for your business?
The acquisition of certain assets is usually the most obvious cost. However, buying an asset and bringing it to stable exploration within the company, are thoroughly different processes that need to be approached differently. Otherwise, once you consider all of the hidden fees and the amount of development costs that need to be further invested, your budget may spiral far beyond the expectations. On the contrary - if a successful TCO model is adopted in your business, it lets you calculate the true costs over a period of time.

How is TCO formed?

All of the costs that accompany the lifetime cycle of an asset, may be grouped in two cost categories - obvious and hidden. If one of the aspects is ignored in the decision-making phase of the assets? acquisition, you might be unpleasantly surprised at a later stage by facing costs you might not have planned initially.

Obvious costs

Purchase cost 

This is the price of the asset itself, negotiated in the pre-buying phase. The purchase cost is what people usually consider as the only or main cost of acquiring new software.

Maintenance costs 

Within these costs are considered all warranty expenses, contracted maintenance services, as well as the maintenance labor.

This first part - the obvious costs - is the tip of the iceberg only. What comes then is what a decision-making executive must consider carefully when buying software - not to risk sinking their ?Titanic?.

Hidden costs

Assets? acquisition costs

The process of assets? acquisition is quite often time-consuming. Before the stage of purchasing is reached, several more phases may have passed - to identify the asset that best matches your needs; to select it; to order - respectively - receive it; to consider the required inventory and finally - to purchase and pay for it. 

Set-up and Deployment costs 

Once purchased and inventorized, the lifecycle of the asset is to begin - starting with the initial set-up process. Then comes the integration with the already existing systems and the outside services, as well as the deployment phase. If time-consuming and not considered in advance, they would also lead to substantial costs generated. 

Reconfiguration, Upgrade and Refurbishing costs

The initial set-up done, it does need to undergo certain changes - in case of business fast expansion, or change of field of operation, or just due to the latest technology trends. Whatever the reason, these are extra costs, again. The same story goes with the enhancement investment, the upgrading costs, the regular refurbishment. All of these are undertaken for the sake of the compliance with the external, business-related requirements (trade trends, marketing trends, users? satisfaction). 

Operating and Infrastructure support costs 

The item may be split in two - on the one hand is the human factor (the IT support needed in between the acquisition to the deployment), on the other - the industrial one. Here are the energy costs, the fuel costs, as well as the costs for heating, lighting and cooling the premises. This is applicable, of course, only in the case you have opted for deploying your software on premises on your servers.

Staff training costs 

The role of the people that are to operate with the acquired assets is quite often underestimated. Depending on the level of turnover, the level of expertise and the expansion projections, different amount of time needs to be invested in training and user-orientation. In case the changes happen on management level, some alterations in the process overflow may need to be implemented as well. All these lead to extra investment, extra hidden costs in other words.

Security costs 

In terms of security, the inevitable costs seem to be neglected at the very beginning. Especially when it comes to data backup and disaster recovery services, the expenses may exceed the asset owner?s expectations.

Financing costs 

Last but not least come the finance-related costs. Whether it is up due to fluctuation in the loan interest, or some extra loan fees, this amount is part of the total cost of ownership.

The list above is, of course, not exhaustive. What the items included are, depends predominantly on the kind of software you acquire. Whether obvious, or hidden, however, these expenses must be taken into consideration in their depth and to be predicted as thoroughly as possible. This is the only way an informed decision to be taken. Otherwise, you, in the position of a CTO or CFO, put your business at risk, hence - the future of the company. The initially announced price is just a part of the total amount you will be expected to invest. Focusing on the purchase, you take into consideration the tip of the price iceberg only, not the iceberg itself. 

Have you been on the verge of taking a non-informed decision and opt for an asset due to the better purchase price only? Have you directly purchased a piece of software, not thinking about the total cost of ownership? Or vice versa? What about the world of e-commerce solutions out there - how do you find the balance between the needs of your flourishing business and the TCO of such acquisition? Share your thoughts below.

Admin user