Maximize IT strategy decision-making with
total cost of ownership (TCO) analysis
Learn more about total cost of ownership (TCO), why it’s important to evaluate for IT decisions
along with tips and considerations when calculating TCO.
Written by Kieran Gash|May 6, 2024
TABLE OF CONTENTS
What is total cost of ownership (TCO)?
Why is it important to calculate TCO?
Considerations when calculating TCO
Examine your IT strategy
We all come across the term total cost of ownership (TCO) because every procurement
and financial decision or sales pitch will likely reference it. Typically, it’s used one-
dimensionally to prove a point or back up emotion with logic. Unfortunately, we rarely
consider the “real world” and the main benefit of assessing the TCO of a decision. This
is typically because TCO doesn’t support the intended goal, it’s difficult to calculate or it
hasn’t been considered altogether.
What is total cost of ownership (TCO)?
TCO is the comprehensive expense of a product or piece of equipment and its
operating costs. Think of it as the bigger picture of a product’s value over time beyond
the initial purchase price.
Why is it important to calculate TCO?
Businesses need to measure TCO to accurately estimate costs across a product’s
entire life cycle, especially when considering upgrading or replacing new technology or
equipment. With full visibility into your actual IT expenses, you can ensure you budget
accordingly and receive the best value.
While it depends on the asset and organization, you can generally calculate TCO by
adding the initial cost of a product and the cost to operate the product during its useful
life. Although the equation seems simple, many factors can affect TCO estimates,
including unpredictable costs from inflation, insurance and power usage.
Businesses in all types of industries often forget about analyzing TCO when gathering
information and considering the next best step for their organization. For the IT
industry, Gartner defines TCO as “a comprehensive assessment of IT or other costs
across enterprise boundaries over time.” This can include hardware, software,
maintenance, training, communications, end-user expenses and losses due to
downtime, damage and replacement costs.
Below are several common examples and use cases our customers are frequently
navigating:
Extending hardware life cycles and maintaining current equipment with the help
of third-party maintenance (TPM)
Exploring new software as a service (SaaS) options
Undergoing a hardware refresh and purchasing new equipment
Transitioning to Infrastructure as a Service (IaaS) or hybrid cloud
It’s rare to have just one option when it comes to IT infrastructure and hardware
strategies. Each option has different advantages and disadvantages, and the best
solution will vary for every business depending on its goals and priorities.
When analyzing TCO, it’s essential to compare every variable without forgetting critical
tangible costs, even if they aren’t in that department’s budget allocation (e.g., IT to
facilities). In addition, highlighting areas that are difficult to identify a cost.
Considerations when calculating TCO
To make fully informed business decisions and maximize the effectiveness of TCO
methodologies across your entire business, consider the items below next time you set
out on a procurement exercise:
What is the breakdown of CapEx and OpEx spending?
What period does finance depreciate assets?
How does this measure meet the current and/or future IT budget?
Facility costs
Rent and/or lease, facility maintenance, insurance, etc.
Energy costs
Heating, cooling and projects for price increases over the considered term
Human capital
Salary, benefits, training, labor costs, etc.
People costs, including projections for increases to salaried employees
Time saved/increased on each option
Supplier management: think service reviews, contract reviews, billing, etc.
Risk of current situation: what could the cost of inaction be?
Knock-on effect: will one change cause another unforeseen cost?
Scheduling time with different business unit leaders to understand the
implications of cost and user experience
What is each option’s non-cost strengths and weaknesses?
Examine your IT strategy
When consulting with existing customers, partners and prospective customers, the
result often exposes the benefit of a hybrid option, choosing the right strategy for the
right workload
