The total cost of ownership (TCO) is an estimate of the expenditures in terms of money, time and all other resources that are required for owning (or leasing) and using some product or system.
The concept of TCO is widely employed by businesses and other organizations when making decisions about computers, particularly with regard to the choice of operating system, the type of hardware and the network architecture.
The TCO for a computer system includes the initial cost for the hardware and software, installation, training (of both administrators and users), maintenance and service contracts, downtime, license compliance, difficulty of customization, power consumption and even disposal.
It also should take into consideration how long the hardware and software can be used. For example, with some software there is considerable pressure from vendors for upgrades every few years, whereas from others there is little or no such pressure, and older versions of the software continue to be supported. Also, upgrades for some operating systems can require major expenditures for new hardware, whereas those for others do not.
It is rarely easy to calculate the TCO. While the tangible costs, such as purchase price and service contracts, can be fairly clear, intangible costs, such as those arising from security problems and difficulty in customizing, can be much more difficult to quantify, but can be just as important.
For example, some organizations place a high priority on being able to freely customize their software. This is particularly true of companies that are rapidly evolving and which want the freedom to experiment and make changes without having to be concerned about restrictive EULAs (end user license agreements) and without revealing their modifications to existing or potential competitors.
A well known example is Google, which selected Linux for its vast number of web servers mainly because Linux provides total freedom with regard to customization. The savings in licensing and administration costs as compared with using a proprietary (i.e., commercial) operating system are a secondary, but still very large, benefit.
Because of the difficulty of calculating TCO, there is often a tendency to rely on calculations provided by a software vendor. However, this is not wise, because vendors obviously have a strong vested interest in selling their products and thus will only provide figures favorable to their products.
For example, many studies have been conducted about the TCO for different operating systems. The results vary wildly, usually according to who is sponsoring the study. The different results are typically a consequence of using different assumptions, such as the number of years that the software will be used, and ignoring some costs, such as those related to security patching and license compliance. Thus it is important for organizations to consider TCO data for the full range of hardware and software options in their decision making process. It is also important to keep in mind the fact that the TCO can vary considerably according to the particular organization, including its business model and its priorities.
Despite the complexities, TCO can be an extremely useful tool, if used with caution. It is fundamental to calculating the return on investment (ROI), which is obtained by dividing the total contribution of an investment to income by its total cost. ROI should be the true criterion in comparing alternatives and making business decisions because it also considers the effects on income and because it is expressed as a percentage.
Created September 20, 2005.