Managers must often make purchase decisions. When you do, make sure you look at the total cost of ownership, not just the purchase price.
Total Cost of Ownership, usually abbreviated as TCO, is a calculation designed to help people make more informed financial decisions. Rather than just looking at the purchase price of an object, TCO looks at the complete cost from purchase to disposal. It adds to the initial purchase price other costs expected to be incurred during the life of the product, such as service, repair, and insurance. TCO is similar to cost benefit analysis, discussed earlier.
TCO IS Not NewAlthough TCO is most often used in connection with Information Technology (IT) these days, the concept has been around longer than IT. The term total cost of ownership is cited in the elevator industry in 1968 and in a 1929 railway manual. One author suggests the concept, if not the term, can be traced back to Napoleon’s time when "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".
TCO In Different IndustriesThe additional costs that must be added to the initial purchase price to calculate the total cost of ownership (TCO) vary by industry (and often by the point an analyst is trying to prove):
- Information Technology industry - TCO is used heavily in the IT industry. When used in evaluating the purchase of a computer or system, usually includes purchase, repairs, maintenance, upgrades, service and support, networking, security, training, and software licensing. However, the costs included in a TCO evaluation can get complex as shown in this TCO concept map.
- Automobile industry – Edmunds.com has a TCO calculator that adds depreciation, interest, taxes and fees, insurance premiums, fuel costs, maintenance, and repairs to the purchase price of a car or truck.
- Financial industry – Many mutual funds and similar products charge quarterly management fees and/or have withdrawal charges. These indirect costs must be considered when calculating the true cost of these investments.
TCO Has Some Different Meanings
As is the case with most TLAs, the abbreviation TCO can mean things other than total cost of ownership.
- At NASA, TCO means Test and Checkout.
- To the Global Terrestrial Observing System, TCO means Terrestrial Carbon Observations.
- The Swedish Confederation of Professional Employees, which is Tjänstemännens Centralorganisation in Swedish, is abbreviated TCO.
- In the housing industry, TCO means Temporary Certificate of Occupancy.
When making a financial comparison between two choices or among several choices, smart managers look at the total cost of ownership (TCO) not just the purchase price. TCO includes all the additional costs required to support and maintain the item purchased for its full useful life.