Total Cost of Ownership Analysis (TCO)
Cost of ownership analysis (or total cost of ownership, TCO), is a business case designed especially to find the lifetime costs of acquiring, operating, and changing something.
Those who purchase or manage computing systems have had a high interest in cost of ownership since the 1980s, when the large difference between IT cost and IT purchase price became known. The five year cost of ownership for major computing systems can be five to eight times the hardware and software acquisition costs.
Today, however, 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 usable life of several years or more. Total cost of ownership is used to support decisions involving computing systems, vehicles, laboratory and test equipment, medical equipment, manufacturing equipment, and private aircraft, for instance.
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 IT system lifecycle stages.
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 is not a complete cost benefit analysis, however. Strictly speaking, TCO pays no attention to business benefits other than cost savings (and these show up in TCO analysis only when different TCO scenarios are compared). When this approach is used in decision support, it is usually assumed that the benefits from all alternatives are more or less equal, and that choices differ only on the cost side.
For practical guidance on TCO analysis and other business case approaches, including development of the cost model and the use of TCO in decision support, see the Solution Matrix white papers or the new edition of our Business Case Guide
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