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GartnerTotal Cost of Ownership (TCO) Model

  • Direct costs
    • Hardware & software including maintenance
    • Operations including staff and facilities
    • Administration including training
  • Indirect costs
    • Downtime
    • End user operations

When companies make decisions about their IT investments, one of the most common problems they encounter is the seemingly simple issue of how much does it cost? Most of the time, it is easy to calculate the purchase price of the hardware or the license fees for the vendor's software. IT projects typically include the costs of conversion to the new hardware or software. But when the analysis stops at that point, companies find themselves wondering why, even after successful project implementations, their IT operations, support and software maintenance costs keep going up.

The reason, of course, is that there are many hidden and ongoing costs that frequently are not considered when a project is originally proposed. Because this issue is so pervasive, a discipline and methodology has been developed called total cost of ownership (TCO) that is designed to properly state the costs of an IT investment.

What Is TCO?
TCO was originally developed in the late 1980s by the research firm Gartner to determine the cost of owning and deploying personal computers. Their initial findings, that PCs cost an enterprise nearly $10,000 per year, caused quite a stir in the technology community and among CFOs. Their methodology was carefully examined and, over the ensuing years, has been accepted as a standard way to evaluate total costs.

Simply stated, TCO consists of the costs, direct and indirect, incurred throughout the life cycle of an asset, including acquisition, deployment, operation, support and retirement.

What Is the Value of Using TCO?
Over the years, TCO has developed into a valuable tool for companies to use in their management of IT spending.
TCO provides a framework for good financial analysis of IT investments. Not only will the true financial costs of an investment be properly computed, but it also allows solid comparisons of similar alternatives. For example, a Gartner study of the costs of "fat" vs. "thin" clients showed that the annual cost of a thin client was $5,160 versus $5,360 for a fat "managed" PC. If the initial purchase price differences of the hardware (roughly $500 for each thin client versus $1,200 for a business-class PC) were all that was considered, a company might incorrectly conclude that a thin client was significantly less costly. The Gartner study shows that initial hardware costs are, in reality, a relatively small portion of total costs.
TCO sets a baseline for IT costs. Since TCO is now an accepted industry measurement, IT organizations can determine their TCO of various operating environments. They then can benchmark themselves against other companies and determine areas where they can improve. TCO should typically show up on an IT organization's balanced scorecard and targets should be set for regular improvement.
TCO generates a widespread understanding that first cost isn't total cost. As the concept of TCO becomes ingrained in the organization, proposals for IT projects become more realistic. When vendors propose some hardware or software solution, there will be less temptation for the end user to come to IT with the demand to "just put it in" without the careful understanding of how that product could impact the total cost structure.
Like other tools, TCO does not solve all problems. For example, because TCO is a long-term measure, reducing TCO only reduces costs over time. So it is hard to capture a TCO reduction as a specific benefit when budgets need to be cut. Also, TCO does not assess risk or help align technology investments with strategic goals/ Nevertheless, TCO is an important tool for the analysis of IT costs and for the management of those costs in an IT organization. With a good understanding of TCO, companies can make proper IT investment decisions and develop solid improvement plans for their overall IT costs.

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