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What is TCO (Total Cost of Ownership).

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TCO stands for Total Cost of Ownership. These are the all costs that come with the purchase/ownership of a product or service. For example, when it comes to purchasing a machine, in addition to the purchase price, this includes maintenance and all materials and services (think software updates, for example) required to keep the machine in production, over the life cycle of the machine. In short, purchase price plus fixed and variable costs over the life cycle of a product or service. Thus, TCO gives a much more accurate picture of the true cost of an investment. This allows for better decisions in product/service selection. Optimizing TCO, therefore, leads to lasting long-term cost savings and better decisions for the business.

TCO and the environment

A TCO analysis will help identify cost savings and improve financial performance. In the case of a broader definition of TCO that includes environmental costs, a TCO calculation can prioritize reducing environmental costs by using more economical and environmentally friendly products. All in all, TCO allows companies to make informed decisions that are both financially and environmentally beneficial. All this ultimately provides long-term cost savings, and it reduces environmental impact through less waste and less use of external resources.

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Relationship between TCO and quality and durability of products

Total Cost of Ownership (TCO) is an essential factor for product quality and sustainability. Using TCO when making a purchasing decision will lead to better choices with higher quality and durability. A lower purchase price may be associated with higher maintenance costs, while a higher purchase price may offer a lower TCO due to better quality and reliability. A cheaper product often comes with additional (previously invisible) costs. So taking TCO into account helps with durable, high-quality products that require less frequent repair or replacement.

Examples of TCO

Practical examples of TCO calculations for different products
Examples of TCO are the calculations of the total cost of ownership for various products over their lifetime or complete life cycle. Some examples are given below.

  • Cars: The total cost of ownership of a car in question includes more than just the initial purchase price. Fuel, maintenance, insurance and repair costs must also be included to get an overall picture.
  • Computers: The total cost of ownership of a computer takes into account the purchase price, maintenance costs, energy consumption and operating costs over its lifetime.
  • Buildings: A building’s TCO takes into account not only construction costs, but in addition the costs of energy, maintenance and repairs over its so-so lifetime.
  • Software: When considering the total cost of ownership TCO for a software solution, consider the purchase price. In addition, the calculation will be done along with all associated costs for training, implementation, maintenance, upgrades and licensing over the life cycle.
  • Phones: The TCO of phones includes the purchase price and the cost of repairs, upgrades and accessories over its lifetime.

These are some simple examples to clarify the picture around TCO. Incorporating Total Cost of Ownership (TCO) calculations into product and purchasing decisions can help companies identify cost-saving opportunities, resulting in long-term cost reductions.

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The role of TCO in the IT industry

TCO can play in the IT industry and important role. In this industry, systems and technologies are constantly evolving, so companies need to invest in the latest hardware and software to remain competitive. IT departments must consider not only the purchase cost of a system but all costs associated with the use of equipment. Furthermore, choosing a system with lower TCO can also reduce downtime, improve effectiveness and increase efficiency. TCO analyses can help IT departments make the right purchasing decisions and optimize their long-term plans. All in all, TCO can be seen as an important factor for the IT industry. In this industry, technologies are constantly changing and therefore, as mentioned, companies need to invest in the latest hardware and software to stay ahead of competition.

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How the TCO approach makes for better purchasing decisions

Using TCO provides insight into the total cost over the life of a product or service. As a company or buyer, you can use TCO calculations to get an accurate picture of long-term costs in terms of money and environment. By using these metrics, hidden costs can also be identified and help make informed purchasing decisions. In short, TCO is, in our view, a very useful tool to deploy within innovative companies.

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