Cost of ownership (COO) or Total Cost of Ownership (TCO)
Cost of Ownership (COO) usually means the total cost of acquiring, installing, using, maintaining, changing, and getting rid of something across an extended period of time (most or all of its useful life). COO figures are often developed for computer systems, medical test equipment, and a wide range of other expensive capital items. Note especially the following:
- COO is always more than purchase price, sometimes many times more. Total five year COO for computing equipment, for example, can be 3 to 10 times the original purchase price.
- Defining the COO subject does not fix the boundaries for the COO analysis. You must still decide and communicate which costs belong in the analysis and why. IT COO comparisons from publishing analysts tend to have a rather narrow scope, focusing on purchase price, maintenance, and very direct operational costs (here the emphasis is on "Apples-to-Apples" comparability). IT COO analyses from sales people, consultants, or managers for specific settings tend to have a broader scope, aiming at the "Total" or "Comprehensive" COO (here the emphasis is on completeness and predictive accuracy for this setting).
- A COO estimate can be the "Cost" side of a cost/benefit analysis, but COO alone does not capture "benefits" except in a very limited way. If the COO figures for different alternative actions are compared (perhaps a "business as usual" scenario and a "change" scenario), one scenario may show cost savings or avoided costs relative to the other.
- COO does not capture financial benefits that come from such
things as increased revenues, increased business volume, improved competitiveness, and
many other factors. This limits the value of a "pure COO" business case in two
important ways:
- COO analysis alone usually cannot provide the basis for estimating "Return on Investment" or financial metrics such as IRR or payback period
- COO alone is a sufficient decision criterion only when all possible actions differ only with respect to cost, but otherwise should have the same positive impact on operations or business performance.
- COO results are usually presented as cost totals rather than incremental costs that go with an action. As such, COO figures have clear, easily interpreted meaning for budgets.
The acronym TCO has become popular during the 1990s, standing for "total cost of ownership." Analyses that claim to present TCO emphasize comprehensiveness, that is, including cost items that may not be obvious at first, but which are nevertheless real, material consequences.
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