Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and

indirect costs Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Like direct costs, indirect costs may be either fixed or variable. Indirect costs include administration, ...

of a product or service. It is a

management accounting In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions. Definition One simple definition of management accounting is th ...

concept that can be used in

full cost accounting True Cost Accounting (TCA) is an accounting approach that measures and values the hidden impacts of economic activities on the environment, society and health. TCA is also referred to as full cost accounting (FCA) or “multiple capital accounting ...

or even

ecological economics Ecological economics, bioeconomics, ecolonomy, eco-economics, or ecol-econ is both a transdisciplinary and an interdisciplinary field of academic research addressing the interdependence and coevolution of human economy, economies and natural ec ...

where it includes

social cost Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...

s. For manufacturing, as TCO is typically compared with doing business overseas, it goes beyond the initial manufacturing cycle time and cost to make parts. TCO includes a variety of cost of doing business items, for example, ship and re-ship, and opportunity costs, while it also considers incentives developed for an alternative approach. Incentives and other variables include tax credits, common language, expedited delivery, and customer-oriented supplier visits.

Use of concept

TCO, when incorporated in any financial benefit analysis, provides a cost basis for determining the total economic value of an investment. Examples include:

return on investment Return on investment (ROI) or return on costs (ROC) is the ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favorab ...

internal rate of return Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or fin ...

economic value added In accounting, as part of financial statements analysis, economic value added is an estimate of a firm's economic profit, or the value created in excess of the Required rate of return, required return of the types of companies, company's sharehol ...

, return on information technology, and rapid economic justification. A TCO analysis includes

total cost of acquisition Total cost of acquisition (TCA) is a Management accounting, managerial accounting concept that includes all the costs associated with buying goods, services, or assets. Generally, it is the net price plus other costs needed to purchase the item an ...

and

operating cost Operating costs or operational costs, are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to mai ...

s, as well as costs related to replacement or upgrades at the end of the life cycle. A TCO analysis is used to gauge the viability of any

capital investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

. An enterprise may use it as a product/process comparison tool. It is also used by

credit market The bond market (also debt market or credit market) is a financial market in which participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, ...

s and

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

agencies. TCO directly relates to an enterprise's asset and/or related systems total costs across all projects and processes, thus giving a picture of the

profitability In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both Explicit co ...

over time.

Computer and software industries

TCO analysis was popularized by the

Gartner Group Gartner, Inc. is an American research and advisory firm focusing on business and technology topics. Gartner provides its products and services through research reports, conferences, and consulting. Its clients include large corporations, gover ...

in 1987. The roots of this concept date at least back to the first quarter of the twentieth century. Many different

methodologies In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...

and software tools have been developed to analyze TCO in various operational contexts. TCO is applied to the analysis of information technology products, seeking to quantify the financial impact of deploying a product over its

life cycle Life cycle, life-cycle, or lifecycle may refer to: Science and academia *Biological life cycle, the sequence of life stages that an organism undergoes from conception to reproduction *Life-cycle hypothesis, in economics *Erikson's stages of psy ...

. These technologies include

software Software consists of computer programs that instruct the Execution (computing), execution of a computer. Software also includes design documents and specifications. The history of software is closely tied to the development of digital comput ...

and hardware, and training. Technology deployment can include the following as part of TCO: * Computer hardware and programs ** Network hardware and software ** Server hardware and software ** Workstation hardware and software ** Installation and integration of hardware and software ** Purchasing research ** Warranties and licenses ** License tracking/compliance **

Migration Migration, migratory, or migrate may refer to: Human migration * Human migration, physical movement by humans from one region to another ** International migration, when peoples cross state boundaries and stay in the host state for some minimum le ...

expenses ** Risks: susceptibility to vulnerabilities, availability of upgrades, patches and future licensing policies, etc. * Operation expenses ** Infrastructure (floor space) ** Electricity (for related equipment, cooling, backup power) ** Testing costs ** Downtime, outage and failure expenses ** Diminished performance (i.e. users having to wait, diminished money-making ability) ** Security (including breaches, loss of reputation, recovery and prevention) ** Backup and recovery process ** Technology/user training ** Audit (internal and external) ** Insurance ** Information technology personnel **

Corporate management Management (or managing) is the administration of organizations, whether businesses, nonprofit organizations, or a government bodies through business administration, nonprofit management, or the political science sub-field of public administr ...

time *Long term expenses ** Replacement ** Future upgrade or scalability expenses ** Decommissioning In the case of comparing TCO of existing versus proposed solutions, consideration should be put toward costs required to maintain the existing solution that may not necessarily be required for a proposed solution. Examples include cost of manual processing that are only required to support lack of existing automation, and extended support personnel.

Facilities and built environment

Total cost of ownership can be applied to the structure and systems of a single building or a campus of buildings. Pioneered by Doug Christensen and the facilities department at

Brigham Young University Brigham Young University (BYU) is a Private education, private research university in Provo, Utah, United States. It was founded in 1875 by religious leader Brigham Young and is the flagship university of the Church Educational System sponsore ...

starting in the 1980s, the concept gained more traction in educational facilities in the early 21st century. The application of TCO in facilities goes beyond the predictive cost analysis for a new building’s “first cost” (planning, construction and commissioning), to factor in a variety of critical requirements and costs over the life of the building: * replacement of energy, utility, and safety systems; * continual maintenance of the building exterior and interior and replacement of materials; * updates to design and functionality; * and recapitalization costs. A key objective of planning, constructing, operating, and managing buildings via TCO principals is for building owners and facility professionals to predict needs and deliver data-driven results. TCO can be applied any time during the life of a facility asset to manage cost inputs for the life of the structure or system into the future.

Developing standards for TCO in facilities

APPA, an

ANSI The American National Standards Institute (ANSI ) is a private nonprofit organization that oversees the development of voluntary consensus standards for products, services, processes, systems, and personnel in the United States. The organiz ...

Accredited Standards Developer, published ''APPA 1000-1 – Total Cost of Ownership for Facilities Asset Management (TCO) – Part 1: Key Principles'' as an

American National Standard The American National Standards Institute (ANSI ) is a private nonprofit organization that oversees the development of voluntary consensus standards for products, services, processes, systems, and personnel in the United States. The organiz ...

in December 2017. APPA 1000-1 provides financial officers, facility professionals, architects, planners, construction workforce, and operations and maintenance (O&M) personnel the foundation of a standardized and holistic approach to implementing TCO key principles. Implementation of TCO key principles can improve decision making, maximizing financial strategies over the life of an asset, starting at the planning and design stage and extends to the end of the asset's life. APPA 1000-2, slated for publication in 2019, will focus on implementation and application of key TCO principals in facility management.

Transportation

The TCO concept is easily applicable to the

transportation Transport (in British English) or transportation (in American English) is the intentional Motion, movement of humans, animals, and cargo, goods from one location to another. Mode of transport, Modes of transport include aviation, air, land tr ...

industry and to motor vehicle ownership, for example, the TCO defines the cost of owning an

automobile A car, or an automobile, is a motor vehicle with wheels. Most definitions of cars state that they run primarily on roads, Car seat, seat one to eight people, have four wheels, and mainly transport private transport#Personal transport, peopl ...

from the time of purchase by the owner, through its operation and maintenance to the time it leaves the possession of the owner. Comparative TCO studies between various models help consumers choose a car to fit their needs and budget. Some of the key elements incorporated in the cost of ownership for a vehicle include:Bartlett, J.
The Cost of Car Ownership Over Time
updated 1 April 2020, accessed 28 January 2021 * Depreciation costs *

Fuel A fuel is any material that can be made to react with other substances so that it releases energy as thermal energy or to be used for work (physics), work. The concept was originally applied solely to those materials capable of releasing chem ...

costs *

Insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...

Financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

Repairs The technical meaning of maintenance involves functional checks, servicing, repairing or replacing of necessary devices, equipment, machinery, building infrastructure and supporting utilities in industrial, business, and residential installa ...

* Fees and taxes *

Maintenance The technical meaning of maintenance involves functional checks, servicing, repairing or replacing of necessary devices, equipment, machinery, building infrastructure and supporting utilities in industrial, business, and residential installa ...

costs *

Opportunity costs In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...

Downtime In computing and telecommunications, downtime (also (system) outage or (system) drought colloquially) is a period when a system is unavailable. The unavailability is the proportion of a time-span that a system is unavailable or offline. This is ...

costs.

References