What is TCO (Total Cost of Ownership)

What is TCO?

TCO stands for Total Cost of Ownership. This is 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 also includes the maintenance and all materials and services (think e.g. software updates) needed to keep the machine in production, during its life cycle. In short, purchase price plus fixed and variable costs over the life cycle of a product or service. TCO therefore gives a much more accurate picture of the true cost of an investment. This allows better decisions to be made in product/service selection. Optimising TCO therefore leads to lasting long-term cost savings and better decisions for the company.

TCO and the environment

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

Relationship between TCO and quality and sustainability of products

Total Cost of Ownership (TCO) is an essential factor for product quality and sustainability. Using TCO when making a purchase decision will lead to better choices with higher quality and sustainability. 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 involves additional (previously invisible) costs. So taking the 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 different 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 operational costs over its lifetime.
• Buildings: The TCO of a building takes into account not only the 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, you need to consider the purchase price. In addition, the calculation will be done along with all associated costs for training, implementation, maintenance, upgrades and licences over the lifecycle.
• Phones: The TCO of phones includes the purchase price and the cost of repairs, upgrades and accessories over their 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 reducing costs in the long run.

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 being developed and therefore companies need to invest in the latest hardware and software to remain competitive. IT departments need to 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 optimise 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, as mentioned, companies therefore need to invest in the latest hardware and software to stay ahead of competition.

How the TCO approach makes for better purchasing decisions

Using TCO provides insight into the total cost over the lifetime 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 the 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.