Why Total Cost of Ownership Is Essential for Enterprise Technology
Generally speaking, enterprise technology solutions require significant investments. Some may appear cost effective and simple decisions; but in reality, they’re not. That’s why it’s important to establish the true Total Cost of Ownership of a given product before you make a buying decision. Only then can you estimate return on investment accurately.
What is TCO?
Total Cost of Ownership or TCO refers to the sum of all direct and indirect costs of a solution throughout the entire solution lifecycle from inception, to deployment, to retirement or replacement. It includes research and evaluation costs purchase price, maintenance costs, technical support, training, integration, potential cost of downtime, and many others.
TCO can be used to compare the economic viability of two solutions. It can also be compared against a solutions TBO (Total Benefits of Ownership) in order to get a rough estimate of the actual value of an investment, which can then be used to evaluate against other business project metrics
Here are two good examples that show why knowledge of an enterprise technology solution’s TCO is essential.
Example 1: TCO of Open Source solutions
Whenever I am discussing TCO, a good example is usually the TCO of open source solutions. When people think about open source solutions, such as Linux, they usually imagine something free or low cost. Well, you may not have to pay license fees. But that’s basically the only ‘free’ thing about it.
There’s the cost of support. Unless an open source solution already has an extensive, well-established community, you’ll have difficulty looking for answers when you encounter an issue. There’s also the cost of integration. It may require more resources to integrate an open source solution with existing proprietary products.
In most cases, the talent pool of a given open source solution needs to be incorporated into TCO analysis. If a given skillset is difficult to find, you may need to pay a premium if you want to hire someone with the required expertise to help you install, configure, maintain, troubleshoot, or integrate your open source solution. Want to build your own on-premise, private cloud using OpenStack because it’s free? The demand for OpenStack engineers has created labor cost structures that need to be considered in your overall evaluation.
Once you’ve factored in the costs of integration, maintenance, etc. and compared it with, a potential proprietary alternative, only then can you make an informed decision on which direction is right for you.
Example 2: TCO of Cloud solutions
One of the biggest benefits of cloud solutions, e.g. IaaS (Infrastructure as a Service), is the extremely low (almost zero) upfront cost. Of course, there’s no free lunch here. Cloud solutions only convert your expenses from a CAPEX model to an OPEX model. So, to calculate a cloud solution’s TCO, you’ll have to factor in utilization rates, growth, integration costs and more.
In order to estimate how much saving you’ll get if you choose one enterprise technology over another, you will want to calculate the TCO of the two competing solutions.
So, for example, if you want to compare IaaS and the other alternative, i.e., an on-premise IT infrastructure, you’ll need to estimate things like:
- The cost of downtime
- The cost of upgrades
- The cost of scaling up and down
- The cost of server deployment
- The cost of disaster recovery
- The cost of space and power
Many of these items involve time and engineer-hours, so you need to factor those in too.
Comparing TCO of cloud based solutions can be complex and made even more difficult by industry factors, such as seasonality or specific compliance requirements in one deployment model or another. Many IT engineers will attempt to take a purchase price of an on-premise solution, divide by 3 years and attempt to compare to a 3 year cloud estimate. This will provide a very inaccurate comparison and will almost always lead to a bad decision.
TCO is just an estimate but…
It’s never easy to calculate TCO. In fact, most values that go into these calculations are just estimates. Prices of parts, services, and other items can rise or fall over time. Some parts might even no longer be available after a number of years. This may in turn force you to make an unplanned (and usually costly) decision.
Nevertheless, this shouldn’t stop you from trying to arrive at your best estimate of a solution’s TCO. A solution’s TCO can serve as your guide in making a wise purchasing decision. It provides a baseline for enterprise technology costs and a framework for arriving at a sound financial analysis of your enterprise technology investments.