(From the editor: This article was originally published on ViewSonic Library.)
Total cost of ownership (TCO) analysis helps determine all the costs involved in making a decision. For many big purchases, the price tag only tells part of the story. Things like enterprise hardware. A fleet of delivery vehicles. Buying a new car.
Hidden costs add up over time. TCO analysis provides clarity on the full range of expenses related to a purchase. TCO analysis – also called life cycle cost analysis – reveals the subtle, indirect costs. Price is obvious. But, many purchases also contain hidden costs.
TCO calculations enable big savings by uncovering the total economic value across an item’s entire span of use. It can uncover big differences between the purchase price and overall costs across an asset’s life cycle.
The TCO concept became popular in the late 1980s. At first, it was used for assessing computer hardware and software purchases. Now, businesses (and consumers) use TCO analysis to make informed purchase decisions about many types of items.
A total cost of ownership analysis defines value across the complete life cycle of an item. It digs deep to uncover all possible costs related to an asset. These include costs related to procurement, installation, use and disposal of an item. Each category typically contains many indirect costs.
When Should Businesses Use TCO Analysis?
Total cost of ownership analysis is a valuable management tool. TCO analysis provides cost-saving insights when choosing vendors, manufacturers, and products. It’s also useful for setting priorities for capital acquisitions and budgets.
In business, TCO analysis helps companies get the best value when deploying a large number of assets. It helps accurately assess costs for items with major operating costs. Or recurring maintenance costs across the useful life cycle.
TCO analysis is useful for guiding cost-saving decisions about IT hardware and software. Fleet vehicles and facilities; lab and medical equipment; factory machines and private aircraft. Calculating total cost of ownership is useful for lease vs. buy decisions. Here’s an example regarding enterprise software:
We often see “free software” as a bargain. Subscription costs don’t matter, as it becomes a chore to calculate the math in our head. But, TCO analysis requires we take all costs into consideration. Looking at 5 Year TCO, we see that Plan A becomes cheaper due to not having any subscription costs.
TCO Impact on Procurement Decisions
TCO analysis saves companies money. It helps businesses purchase the best, most cost-effective assets to meet their needs. Getting the full TCO picture guides buyers to smart purchase decisions. It should be used to gauge the viability of most major purchases.
Your purchasing manager, however, may want to base purchase decisions on up-front price alone. It’s tempting (and seems easier) to look at the immediate cost of an item. Taking the time to do a detailed TCO analysis uncovers less apparent indirect costs – preventing unnecessary future losses.
Consider all the factors. Then compare the bottom line. The option with the lowest TCO will be a better value over time. Start by asking: what is the expected ownership life for this item? Next, ID essential cost categories that will have an impact on overall cost.
Within these, probe into all possible costs: obvious, hidden, immediate and indirect. Hidden costs can have a big impact on overall cost across an asset’s life cycle. Costs to consider include:
Total cost of acquisition & preparation for use:
- Net cost of an item after discounts, purchase incentives, etc.
- Costs of accessories needed to install or use the product.
- May include costs for future planned upgrades or accessories.
- Deployment and setup costs. These can include rearranging space.
- Transportation and installation. Integration and outside services.
- Change management costs such as training and workflow process changes.
Here’s an example of TCO analysis when buying enterprise hardware:
We typically think the cheaper option is usually better. But, cheaper hardware typically comes with hidden costs.
Total cost of operation (operating costs)
- Costs required to use the asset
- Utility and/or fuel costs
- Supply costs
- Operator training and labor
- IT or other specialized support costs
- Other staffing costs related to using the asset
- Costs of facilities to house an asset
- Subscriptions or services needed to use the item
- Expected maintenance and repair costs
- Insurance costs
- Security costs (physical or data)
End-of-life costs
- Dismantle and disposal costs
- Environmental impact costs
- Residual value – resale or salvage value
TCO Use Case: Computer Workstations and Displays
The procurement and use of computing workstations include many indirect costs. Operating costs and opportunity costs can have a huge impact. Looking beyond the purchase price will save companies money in the long run.
Assessing these four categories provides a more accurate picture of hardware life-cycle costs:
- Deployment
- User experience
- Service and maintenance
- Recycling and disposal
Deployment costs include more than meets the eye. First, the hardware needs to be transported to the deployment site. Packaging and weight make a difference here. Once the product has arrived, install time impacts IT staffing assignments.
Easy install means more time to achieve other goals. (For lower opportunity costs.) When installation hits roadblocks, other tasks can be delayed, leading to opportunity costs. Products designed to reduce unnecessary parts and labor deliver a better TCO.
User experience can be an overlooked aspect of total cost of ownership. Hardware that’s difficult to figure out or isn’t comfortable to use can send costs skyrocketing. Poor workstation ergonomics can lead to repetitive strain injury.
Ailments range from headaches and eye fatigue to muscle pain severe enough to keep employees home from work. The U.S Bureau of Labor Statistics estimates that around 30% of lost work time is due to a work-related musculoskeletal disorder (WMSD).
Workers who push through the pain and stay in the office are undoubtedly less productive. The opportunity costs can be huge. When new equipment is easy for users to adapt to, productivity is preserved. The shorter the learning curve, the better.
Intuitive setup and use lets employees learn as they go, minimizing training and support costs. Reliable products reduce service and maintenance needs. Knowing the average failure rate can help businesses estimate future costs for shipping replacement units.
Will your IT staff be able to troubleshoot the equipment on site? Or will there be costs to ship units to the vendor for repair? Either way, the costs of employee downtime is another potential hit to your bottom line.
With large quantity rollouts, storage and recycling costs can add up quickly. Is the product smartly packaged to reduce materials you’ll need to dispose of? Consider a supplier’s packaging materials and whether they can be easily recycled. Or whether they’ll have a negative environmental impact.
Lower Business Total Costs
Some manufacturers take TCO more seriously than others. ViewSonic designs and packages products with your overall costs in mind. The latest ViewSonic® enterprise displays reduce indirect costs across the entire product life cycle. Every model reduces TCO beyond the initial purchase price.
