Cost of ownership (COO) / Total Cost of Ownership (TCO)
A Cost of Ownership analysis (or Total Cost of Ownership, TCO Analysis), is a business case designed especially to find the lifetime costs of acquiring, operating, and changing something. TCO often shows there can be a large difference between the price of something and the cost of something.
Those who purchase or manage computing systems have had a high interest in TCO since the 1980s, when the potentially large difference between IT cost and IT purchase price started started drawing the attention from IT vendor marketing (largely from competitors of IBM). The five year cost of ownership for major computing systems can be five to eight times the hardware and software acquisition costs.
Today, TCO analysis is used to support acquisition and planning decisions for a wide range of assets that bring significant maintenance or operating costs across a long usable life. Total cost of ownership is used to support decisions involving computing systems, vehicles, buildings, laboratory equipment, medical equipment, vehicles, factory machines, and private aircraft, for instance.
Note that TCO is always more than purchase price, sometimes many times more. Total five year TCO for computing equipment, for example, can be 3 to 10 times the original purchase price.
TCO Analysis Calls for Judgement
Simply naming the cost of ownership subject does not fix the boundaries for the analysis. You must still decide and communicate which costs belong in the analysis and why. Consder that:
- IT TCO comparisons from publishing analysts tend to focus more narrowly, on purchase price, maintenance, and very direct operational costs (here the emphasis is on "Apples-to-Apples" comparability between different vendor solutions).
- IT TCO analyses from sales people, consultants, or managers for specific settings tend to have a broader scope, aiming at the a larger "Total" lifetime cost (here the emphasis is on predicting budget impacts accurately and, sometimes, on comparing the total costs for quite different kinds of proposed actions).
TCO Analysis Calls for a Cost Model
Good TCO analysis brings out the "hidden" or non-obvious ownership costs that might otherwise be overlooked in making purchase decisions or planning budgets.
The analysis begins with the design of a comprehensive cost model that completely covers the subject of the case, and which supports the purpose and needs of decision makers. The figure above, for instance is the structure of an IT acquisition cost model that works well for many situations. Cells of the matrix identify cost items that are planned and managed together (have common cost drivers); rows represent major resource categories, and columns represent different kinds of IT system lifecycle events.
The model provides an effective tool for assuring business case builders and case recipients that every important cost item is included and that everything irrelevant is excluded.
TCO Analysis Ignores Business Benefits (Except Cost Savings, Sometimes)
TCO analysis is not a complete cost benefit analysis, however. TCO pays no attention to many kinds of business benefits that result from projects or initiatives, such as increased sales revenues, faster information access, improved competitiveness, or improved product quality. When TCO is the primary focus in decision support, it is assumed that such benefits are more or less the same for all decision options, and that management choices differ only in cost.
TCO may be used, however, to find the benfits cost savings and avoided costs. These benefits show up when TCO for one scenario is compared to TCO for another scenario. If TCO is less under a "Proposal" scenario than TCO under a "Business as Usual" scenario, for instance, the result is an expected cost savings under the proposal scenario.
For examples showing how estimated costs produce estimated savings, and for guidance on building the TCO cost model, see Business Case Essentials or The Business Case Guide.
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