Question

When performing a cost estimate for a software package, we are concerned with both a “1^stday” cost and Total Cost of Ownership (TCO). Explain what this means and how each of the costs associated with a software package affect both “1^st day” cost and TCO.

Answer 1

Total Cost of Ownership (TCO) is a model that is used to identify and analyze the overall costs associated with ownership of Information Technology (IT) assets, from cradle to grave. Reducing the cost of ownership of IT investments will result in a higher Return On Investment (ROI).

Put simply, the total cost of ownership is the sum of all costs and expenses related to buying, implementing, and managing your software solutions (either directly or indirectly). This value includes the entire lifecycle from the time of purchase. You can measure each software individually, but it’s also recommended to include every software you operate to gain a true understanding of what your comprehensive technology stack is really costing your business.

Total Cost of Ownership (TCO) is important because it shows you what you actually end up spending when you purchase something. This is true for things that require maintenance such as cars and machinery. For the most part, it's businesses that use TCO. But, individuals can use it when it comes to deciding whether to make a big purchase or not. If you have a limited income, then it's all the more important to consider the total cost of ownership of an item before buying it. Sometimes, that TCO is greater than what you can really afford.

As you can see, using TCO to help you make purchasing decisions is beneficial. On a Business level, using TCO before making a purchase is equally important because most likely you are on a limited budget. Whatever you decide to purchase has to stay within that budget.

Using TCO also helps businesses to decide whether to lease a product requirement versus buying it. TCO will show at what point it becomes cheaper to own a product rather than to lease it.