Home / Total Cost of Ownership (TCO)?

Total cost of ownership (TCO) is a financial estimate that is used to determine the direct and indirect costs of an asset, plus the costs of operation, over its entire lifecycle. A TCO analysis can include the cost of acquisition, operating costs, and even the replacement or upgrade costs at the end of its lifecycle. The concept was popularized by the Gartner Group in the 1980s, but the idea has been in practice since the 1920s. TCO analysis helps an enterprise evaluate competing products, and can also help calculate profitability over time.

TCO is frequently applied to the analysis of IT products. Technology costs are scrutinized by calculating the acquisition expenses, including the actual hardware and software costs, the installation and integration costs, warranties and licenses, migration expenses, and even accounting for risks like susceptibility to issues and attacks, ease of upgrades and patching, licensing policies, and more.

Operational expenses are estimated using the costs of floor space, the electricity needed to cool and power the space, testing, the risks associated with downtime and outages, backup and recovery systems, the potential costs of security breaches, the costs of user training, insurance and auditing, and much more. Long-term expenses are also factored in, including the eventual replacement costs, scalability expenses, and the costs associated with decommissioning.

TCO analysis plays an important role in software procurement processes. Factors like the kinds of hardware required by the software, as well as differences in licensing models between vendors, play an important role in purchase decision. For example, SUSE Linux Enterprise Point of Service offers significantly lower TCO because it has no software licensing fees, and it can easily run on lower-end, older machines. These kinds of TCO benefits can be highly persuasive in a competitive marketplace where there is a lot of feature parity between products.