Total cost of ownership (TCO) is an analysis that looks at the hidden costs beyond price and places a single value
on the complete life-cycle of a capital purchase. This value includes
every phase of ownership: acquisition, operation, and the softer costs
of change management that flows down from acquisition such as
documentation and training.
Watch the Video Below for a Quick Understanding of How TCO Affects Purchasing Decision, Before Continuing Below.
Total cost of ownership/TCO highlights the difference between purchase price and long-term cost. This analysis came into the spotlight starting in the mid-eighties due to the expenses in supporting hardware and software IT acquisitions. Managers discovered that supporting the equipment and software could cost between 5 and 8 times the purchase price.
Once the differences between total cost of ownership (TCO) and price came into the forefront, companies began to take advantage of this calculation for a number of different capital investment decisions: buildings, vehicles, manufacturing equipment and information technology infrastructure.
There are a number of different ways this analysis is useful to decision makers. Total cost of ownership (TCO) analysis can help make critical lease vs. buy comparisons. By incorporating this into the acquisition process, it directly impacts outcomes in vendor selection, prioritization of capital acquisition, and overall corporate budgeting.
True total cost can include not only costs but incremental savings or revenue flows created by the capital investment. The change in cash flows versus the "business as usual" option is what mitigates total cost of ownership (TCO). Those monies must be valued using Net Present Value calculations to consider the values over time.
Real total cost of ownership (TCO) analysis is a critical tool in the decision-making toolbox for any sized business. It requires both an understanding of the investment considered and the potential business impact to find the right answer.