Now that we remember why TCO matters, let’s look at how to figure it out. We know that you know how to assess total cost of ownership. And while we don’t always have to reinvent the wheel, it is a good idea to see and consider what others are doing in their respective markets. So, let’s take a peek at how it’s done...
First, a quick refresher on the major components of TCO. The illustration below, from Group50 Consulting, groups costs into five major categories and lists their affiliated costs underneath. While this list is not exhaustive, it is indicative of an issue that many procurement departments face: the need to customize the TCO model for the organization and its products/services.
Total Cost of Ownership Model
The vast array of products and services on the market supports the lack of a definitive formula for determining TCO. In most cases, we’re trying to fit a square peg in a round hole. Perhaps a better idea would be to develop formulas for different categories to make the task of determining TCO more beneficial. As an example, check out the links below for some fresh takes on TCO for two major categories: equipment and software. See how the cost components vary between the two and you’ll soon realize the need to adjust your organization’s TCO model according to what you’re purchasing.
Take a look at this formula for determining the TCO of new equipment. It’s great because it’s straightforward and includes some interesting components that one might miss, such as downtime and remaining value costs – all of which play into total TCO.
This TCO Calculator helps determine the TCO for an on-premise software system versus a Software-as-a-Service (SaaS) system. Just plug in your numbers and the calculator provides a cumulative spend across a 10-year span. But, notice how different the cost components are from those listed in the equipment link above.
Note: While the calculator does not include a category for every cost imaginable, there is an “Other costs” category you can fill in should you need.
The links provided are just two examples within two categories. There are, as you know, many more to choose from – some of which are free and others that come at a cost. Regardless, the benefits of TCO analysis are too good to place on the backburner. If your organization isn’t concerned with TCO analysis, it is imperative that you get buy-in from internal stakeholders to action this part of the procurement process ASAP. If your organization already has TCO analysis in place, then at the very least, it’s time to reassess the process to ensure its running as effectively as possible, i.e. customizing your TCO formulas by category, if you haven’t done so already.