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What is TCO?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 23 August 2016
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Total Cost of Ownership (TCO) is a way of looking at the complete cost of an asset, including initial acquisition, maintenance, required training, repairs, and other associated costs. The concept of TCO began to be used in a widespread manner in the financial world in the late 1980s, when new technologies were being rapidly developed and it was sometimes difficult for companies to understand the value of their assets. TCO appears commonly in the automotive and technology industries, where consumers are encouraged to weigh the TCO of products that they purchase.

TCO starts with the initial cost for the asset, including taxes and fees. Then, costs associated with the asset must be taken into account as well. In the example of a car, the vehicle will require insurance, regular maintenance, fuel, and repairs. The potential purchaser might weigh the cost of a cheap car against expensive repairs, or vice versa, and determine which choice is more practical. While most commonly used by large firms, individuals can be well served by TCO analysis of major life purchases such as computers, cars, and homes.

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In the case of computing, TCO is sometimes estimated to be as much as four times the cost of the initial computer, which can be especially devastating in office environments where large and expensive computer systems are purchased. TCO for a computer includes hardware and software upgrades, technical support, database upkeep, training, and maintenance, especially in large companies where staff members specialize in keeping up the computer equipment. Often these factors are not accounted for when first estimating the cost of a new computer system, and this can have disastrous results when a limited budget is involved.

TCO can also look at associated costs, some of which may be more intangible. For example, a company which handles secure data usually considers the cost of security breaches and failures. In addition to representing a costly data recovery process, security breaches can also lead to a major lack of faith in the company, which can cause the loss of customers. Virus vulnerability is also a concern, with potential data loss due to viruses being an important part of TCO.

When considering a major investment, it is important to look at TCO so that there are no unpleasant surprises associated with the new acquisition. There are a number of professional firms which undertake TCO analysis for a small fee, and this route is advised for companies embarking on large investments. For individuals, new purchases should be researched thoroughly before committing.

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David09
Post 4

The article talks about the total cost of ownership for computers. While computers can be expensive, there are ways to reduce the total cost of ownership.

One such method that is becoming popular – and one that we use in our business – is server virtualization. This is where a server is virtualized, or made to appear as many different servers on one machine.

Many users can access one server as if they each had their own server. Thus, server TCO is substantially reduced using this model. Furthermore, there are some server virtualization tools that are free too, making it even cheaper.

MrMoody
Post 3

@robbie21 – I’m glad that worked out for you. I have a total cost of ownership story to tell about a car I bought, but it didn’t end out so well. I bought a salvaged car a few years back; it was a Honda.

It was my first ever used car purchase and I got it from a mechanic at less than $4,000. Since it was a Honda I thought I couldn’t go wrong.

That was my first mistake.

You can always go wrong if you buy a salvaged vehicle. Over the next five years I spent an average of $1,000 a year in repairs. So my total cost of ownership was $9,000. My cheap Honda became an expensive Honda.

One day it just wouldn’t start and I sold it to another friend who was a mechanic and could appreciate – and fix – broken vehicles.

robbie21
Post 2

@ElizaBennett - That's so smart! I admit, I usually just guesstimate what will be the best purchase.

A lot of people don't realize the TCO of their cars. My husband and I used to be a two-car family, but then my husband got in an accident. While we waited for the settlement, we got by with just one car for about three months.

We were so surprised by how much extra money we had! The difference was much greater than we expected based on just the car payment.

ElizaBennett
Post 1

My husband and I always consider total cost of ownership when we make a major purchase. It's something more people should pay attention to!

We break it down by year, too. A computer that costs $800 but will last four years is better than a $600 computer that lasts just two and a half (all other things being equal).

It can be complicated, so a lot of people just give up. For instance, we were buying a washing machine as had to decide whether to buy a front-loader (more water- and energy-efficient) or traditional top loader. In order to make the best decision, we had to estimate how long each would last, how frequently they might need to be repaired, how many loads of laundry we do a week, how much our water and electricity cost, etc. But if you put a little time into it, you'll find you can make much better decisions.

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