Total Cost of Ownership
Examples include: return on investment, internal rate of return, economic value added, return on information technology, and rapid economic justification. A TCO analysis includes total cost of acquisition and operating costs. A TCO analysis is used to gauge the viability of any capital investment. An enterprise may use it as a product/process comparison tool. It is also used by credit markets and financing 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 over time.
Computer and software industries TCO analysis was popularized by the Gartner Group in 1987.  The roots of this concept date at least back to the first quarter of the twentieth century.  Microsoft then embraced the concept and commissioned various white papers and case studies in the late 90s to show that Windows had a lower TCO than Linux. The studies have not been found to be either objective or conclusive.  Many different methodologies and software tools have been developed to analyze TCO. TCO tries to quantify the financial impact of deploying an information technology product over its life cycle.
Total Cost of Ownership Essay Example
These technologies include software and hardware, and training. Technology deployment can include the following as part of TCO: • Computer hardware and programs o Network hardware and software o Server hardware and software o Workstation hardware and software o Installation and integration of hardware and software o Purchasing research o Warranties and licenses o License tracking – compliance o Migration expenses o Risks: susceptibility to vulnerabilities, availability of upgrades, patches and future licensing policies, etc. • Operation expenses Infrastructure (floor space) o Electricity (for related equipment, cooling, backup power) o Testing costs o Downtime, outage and failure expenses o Diminished performance (i. e. users having to wait, diminished money-making ability) o Security (including breaches, loss of reputation, recovery and prevention) o Backup and recovery process o Technology training o Audit (internal and external) o Insurance o Information technology personnel o Corporate management time • Long term expenses o Replacement o Future upgrade or scalability expenses Decommissioning Transportation industry The TCO concept is widely used in the transportation industry. For example, the TCO defines the cost of owning an automobile 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: • Depreciation Costs • Fuel Costs • Insurance • Financing • Repairs • Fees and Taxes Maintenance Costs • Opportunity Costs See also • Cost to company (CTC) • Activity-based costing • Life cycle cost analysis • Total benefits of ownership • Total cost • Total cost of acquisition TCO Webopedia Abbreviation of Total Cost of Ownership, a very popular buzzword representing how much it actually costs to own a PC. The TCO includes: • Original cost of the computer and software • Hardware and software upgrades • Maintenance • Technical support • Training Most estimates place the TCO at about 3 to 4 times the actual purchase cost of the PC.
The TCO has become a rallying cry for companies supporting network computers. They claim that not only are network computers less expensive to purchase, but the TCO is also much less because network computers can be centrally administered and upgraded. Backers of conventional PCs, especially Microsoft and Intel, have countered with Zero Administration for Windows (ZAW), which they claim will also significantly reduce TCO. March 21, 2008 • Vol. 30 Issue 12 Page(s) 24 in print issue Info-Tech Insight TCO: What? s Old Is New
A colleague of mine recently posed an innocent question, “When did the concept of total cost of ownership emerge? ” Several responses pointed to the actions of the IT analyst community in the mid-1980s. Another colleague said, “Phooey. We used TCO at UNIVAC in the 1970s. ” But the concept seems to be much older. [pic]In Search Of TCO The New York Times is always a good source for harnessing zeitgeist. The first technology article in the Times that mentions “total cost of ownership” dates from March 1995. It’s called “The Executive Computer; A Dinosaur in Open Systems Clothing” and parrots the analyst lingo.
It’s about? no surprise? the AS/ 400. The classifieds are more interesting. An ad from July 16, 1967, lists total cost of ownership as a crucial skill for a “Support Systems Life Cycle Cost Analyst” for the aerospace industry. I should note that this ad predates the birth of the IT analyst industry by several years. The academic literature also points to this era as the possible beginning for TCO. A 1976 article in the Journal of Finance, “Leasing, Buying, and the Cost of Capital Services,” discusses the “total cost of ownership” for production machinery.
More remarkably, a review in Quality Progress from 1968 notes, “Total cost of ownership is being used profitably in the elevator industry. ” OK, elevators aren’t IT, but the concept certainly seems the same. So TCO dates back at least to the late 1960s, perhaps a result of free love and pervasive civil disobedience (as anyone with experience at UNIVAC could doubtless relate). But a little additional digging demonstrates that the concept is even older and appears in a few dusty books. “Principles of Engineering Economy” from 1938, for example, includes the term in the introduction and on pages 17 and 18.
Most dramatically, however, “Manual of the American Railway Engineering Association” (1929) notes that, “in the event there is a surplus of power then the total cost of ownership should be multiplied by the ratio of the cost of repairs to the total. ” [pic]Just How Old Is TCO? After reveling in my discovery that TCO dates from at least 1929, a colleague noted that the ancient Egyptians probably used the concept (assisted, no doubt, by some handy big iron from UNIVAC). I doubt that the Egyptians had the concept of TCO given their habit of making capital investments with extreme durability.
The notion of “replacement period” doesn’t make a lot of sense when we’re talking about housing the eternal souls of living gods. And labor costs are largely moot for a nation of slaves. The Greeks and Romans probably didn’t really have TCO either. They divided the world of knowledge into three realms: episteme, knowledge of the world as best represented by mathematics; praxis, the applied knowledge of political leaders; and techne, the base knowledge of masons, weavers, and other artisans. As with the Egyptians, techne was the realm of slaves and was despised by the rest of society.
This prejudice persisted through the collapse of the Roman Empire and through the Middle Ages. The medieval traditions of scholasticism and, later, humanism deprecated anything to do with technology. It wasn’t until the introduction of gunpowder at the Battle of Crecy in 1346 and the rise of bastioned fortification to resist gunpowder artillery that technologists really started to get the recognition, and compensation, with which we are now familiar. [pic]TCO: “Revolution” In French The concept of utility and efficiency, core principles of TCO, didn’t emerge in the Renaissance.
As in the realm of art and sculpture, technology was the product of virtuosi, not to be repeated on a mass scale. I suspect that the base principles of TCO emerged with the French physiocrats of the late 18th century, such as Anne-Robert-Jacques Turgot or Fran? oise Quesnay. They established crucial elements, such as “investment capital” and “diminishing returns. ” Their concepts were subsequently expanded by Adam Smith in his “Wealth of Nations. ” They were crucial for the later institutionalization of engineering and science that occurred during the French revolutionary era, particularly the rationalization of the armories.
Napoleon’s engineers began to pay very close attention to issues like the effectiveness of cannons, how easily they were moved and repaired, and how long they lasted in active service. While they didn’t call this process TCO, the core elements were certainly there. So, if I had to guess, TCO dates not from the late 1980s but from the late 18th century. There’s an important lesson in this. The key takeaway for me is that most good advice has a much longer history that we realize. Sometimes, it even predates UNIVAC. August 2008 What that car really costs to own
Knowing a vehicle’s cost over time can save you thousands in the long haul [pic] Illustration by Carlo Stanga A less-expensive car can cost you more in the long run than a more-expensive alternative, our new ownership-costs comparisons have found. At about $17,500, a Mitsubishi Lancer could cost $4,000 less than a base Mini Cooper to drive home. But when you estimate the total costs of ownership for each car, the Lancer could cost you $5,000 more over five years. A Toyota Highlander can cost you $3,000 more to purchase than a Ford Explorer V6, but owning the Ford after five years can cost $6,750 more.
In addition to shopping for a good deal, car buyers should also consider how much a model will cost them to own. That includes depreciation, fuel costs, interest, insurance, sales tax, and maintenance and repair costs. To help, Consumer Reports is introducing its new owner-costs estimates, which can help you compare models and could save you thousands of dollars. The “owner costs” Ratings cover one, three, five, and eight years of ownership and are based on a comparison of all models within the Consumer Reports database over eight years.
Because depreciation is factored in our estimates, we assume that the vehicle will be traded in at the end of the term. COSTS VARY AMONG SIMILAR MODELS [pic] WHERE THE MONEY GOES Here is how ownership costs break down over five years, based on our study of more than 300 vehicles. In analyzing ownership costs we made some notable discoveries: • While Hyundai and Kia models have low prices and long warranties, the savings are often offset by poor resale values. Hyundai’s Accent and Elantra don’t prove any less expensive after five years than Honda’s more expensive Fit and Civic. Most Lexus models have relatively high maintenance and repair costs (primarily due to maintenance), despite excellent reliability. The Lexus ES350 racks up an average of $2,300 in maintenance and repair in the first five years, about twice what you’d pay on a Lincoln MKZ. • A little sports car can cost less to own than a family sedan. The Mazda Miata and Mazda6 V6 sell for about the same price. But at the end of five years, we estimate the Miata owner will be about $7,750 ahead. • The Toyota Prius is one of the few hybrids that can save you money.
It costs about $7,500 more than a similarly sized Chevrolet Cobalt to buy but costs almost $3,500 less over five years. CALCULATING THE COSTS Our cost of ownership Ratings comprise six main factors: Depreciation is the largest cost factor by far. On average, it accounts for about 46 percent of total ownership costs over five years. Depreciation is a vehicle’s loss in value over a defined period. To calculate it, we start with the price of a typically equipped model and factor in the discounts offered off of the manufacturer’s suggested retail price on some models. The average model depreciates about 65 percent over five years.
Some vehicles depreciate faster than others because of oversupply, limited appeal, or rebates on similar new models. When we don’t have depreciation data for a new model, we use estimates based on comparable vehicles. Fuel costs can really add up, especially for SUVs. For example, you could pay more than $15,000 to fill up a Dodge Nitro over five years, while a similar-sized but more-efficient RAV4 V6 could save you $4,000 during that time. To calculate fuel costs, we assume the vehicles are driven 12,000 miles a year, the average reported by respondents to our annual survey.
To that we apply the national average price of $4. 00 a gallon for regular gas as of early June 2008. For models that require premium or diesel fuel, we use these costs: $4. 20 a gallon for premium, and $4. 80 for diesel. On average, fuel is the second-largest cost of vehicle ownership, at 26 percent over five years. Interest is tied directly to vehicle price, and accounts for about 12 percent of five-year ownership costs. We calculate it based on a five-year loan, with a 15 percent down payment, because that is how many people buy cars.
We use the average interest rate of 6. 8 percent as reported by Bankrate. com in June 2008. Insurance costs vary depending on many factors, including your age, location, and driving record. And they can dramatically boost the ownership costs of models that otherwise would seem affordable. For example, if you’re looking for a fast car on a budget, steer clear of the Mitsubishi Lancer Evolution. Insurance can run $2,500 a year or more. Conversely, the similarly priced Acura TL can cost as little as $900 to insure over a year.
Overall, insurance makes up about 11 percent of total ownership costs over five years. Costs are derived from data from the Highway Loss Data Institute. Maintenance and repair costs make up 4 percent of ownership costs over five years on average, according to data from 675,000 Consumer Reports subscribers who responded to the online version of our 2007 Annual Car Reliability Survey. They gave us their estimated costs for the last year-excluding tires-and their responses provided data for more than 300 models on vehicles up to eight years old.
We used estimates based on similar models when data was unavailable. The majority of the costs are covered by the factory warranty during the first few years. But for some vehicles it can still add up. On average, we found that the Range Rover is the most expensive vehicle to own for maintenance and repairs, costing about $2,000 in the fifth year alone. But the Toyota Land Cruiser is also luxurious and very capable off-road and costs only $600 in that year. Sales tax costs owners about as much as maintenance and repair does. We use the national average of 4. 9 percent.