Comparing and Selecting Solutions Using TCO Analysis
Total Cost of Ownership (TCO) refers to a useful accounting system to tally all of the costs associated with a given asset over its entire useful life. Costs are tallied for planning, acquisition, setup & installation, manage & support, evolution and retirement.
TCO was born in the late 1980s by Bill Kirwin of Gartner, used to initially compare the costs of mainframe / minicomputers with PCs and networks. In these studies of early IT investments, the purchase price of the hardware and software was found to be only 15% of the total cost of owning the asset. Management, direct support and hidden user support accounted for 85% of the total cost over the useful life of the asset. At the time, a PC that cost $2,000 to $3,000 might actually cost the organization over $8,000 per year or more to keep in service.
TCO is most useful when comparing different solution options, to determine which provides the lowest cost of ownership.
To do this, TCO first creates/uses an accounting system to tally all costs for the solutions being compared, when done correctly assuring that no costs are overlooked. The accounting system is called the “Chart of Accounts”.
Second, for all the solutions being compared, the costs are tallied for each cost category. Placing these costs in the chart of accounts and comparing them head to head illustrates where some solutions are more expensive than others. Totaling the costs for each solution and comparing the totals indicates the lowest total cost solution.
Rightly so, by focusing on costs alone, the dramatic benefit differences of and between proposed solutions could be overlooked. It is therefore important to compare not just the TCO of different solutions, but the ROI differences as well (where ROI takes into account total cost of ownership versus benefits for each proposed solution).