Comparing and Selecting Solutions Using TCO Analysis
Comparing and Selecting Solutions Using TCO Analysis"TCO is defined as the total cost of procuring, using, managing and disposing of an asset over its useful life.”– Bill Kirwin - the Father of TCO, GartnerTotal Cost of Ownership (TCO) refers to a useful accounting system to tally all of the costs associated with agiven asset or service over its entire useful life. An asset / service could be a new computer system, software,factory equipment, truck, or service – anything being considered for purchase that requires an investment, andhas a useful service life or contract term.To tally the total costs, estimates are made over the entire useful lifecycle, not just up-front acquisition costs.Investments are quantified for capital and operating costs, across the stages of the lifecycle: planning,acquisition, setup & installation, manage & support, evolution and retirement.To calculate TCO, costs are tallied throughout the useful lifecycle versus just considering purchase costs. This provides a true picture of total costs and is useful for highlighting true cost advantages.TCO a Requirement for B2B Buyers and SellersToday’s frugal buyer requires the best value from every solution. Today, most demand the lowest pricesolution, but this does not always represent the best value over time. For buyers, TCO helps stakeholders tomake better decisions by considering required expenditures beyond the original purchase costs, to includecosts over the entire useful lifecycle such as service contracts, management and support, power and cooling,facilities space costs, evolution, and retirement costs.In such a frugal environment, vendors need to proactively prove superior value in order to get the deal andbeat out the competition. For sellers, TCO provides an account of all costs for various solutions, helpingvendors compare and contrast their solutions with others, proving which solutions are not only less expensiveup-front, but in total costs over time.TCO became most well recognized as a method for determining the best value computer system. Born in thelate 1980s by Bill Kirwin of Gartner, the methodology was used to initially compare the costs of mainframe /
minicomputers with PCs and networks. In these studies of early IT investments, the purchase price of thehardware and software was found to be only 15% of the total cost of owning the asset. Management, directsupport and hidden user support accounted for 85% of the total cost over the useful life of the asset. At thetime, a PC that cost $2,000 to $3,000 might actually cost the organization over $8,000 per year or more tokeep in service. A sample 1994 comparison of TCO for PCs showing the top level ―chart of account‖ line itemsSince that time, total cost of ownership comparisons have been applied to many asset and service purchasecomparisons, helping buyers and sellers make better purchase decisions.TCO has proven most useful when comparing different solution options, to determine which provides not justthe cheapest purchase price, but the lowest total cost of ownership solution over the lifecycle. To accomplishthis, TCO first uses an accounting system to tally all costs for the solutions being compared, when donecorrectly assuring that no costs are overlooked. The accounting system is called the ―Chart of Accounts‖.Second, for all the solutions being compared, the costs are tallied for each cost category. Placing these costsin the chart of accounts and comparing them head to head illustrates where some solutions are moreexpensive than others. Totaling the costs for each solution and comparing the totals indicates the lowest totalcost of ownership solution.
A TCO head-to-head comparison illustrating the top-level chart of account items used for comparison.TCO versus ROIWhen comparing solutions, TCO only shows a portion of the decision making criteria. TCO is focused on costs,but places little on comparing the different business value of the asset. For example, to lower the TCO ofproductivity tools for users, desktop computers could be replaced with pen and pad, which has a TCO of$1.50, compared to an estimated $3,000 per year for the typical Windows computer system.As Lenny Liebmann of ComputerWorld indicates, ―Lower TCO doesnt mean higher ROI: This is a classic error.The assumption is that if you whittle down the cost of a resource, it will provide a higher return on investment.Not! If I buy a cheap used car and lose my job because I cant get to work reliably, did I really save money?Sure, buyers must control costs, but not through some arbitrary goal that isnt linked to real business drivers.‖Obviously, more needs to go into the consideration than just TCO, but TCO is very useful in bringing thediscussion beyond mere purchase price.Rightly so, by focusing on costs alone, the dramatic benefit differences of and between proposed solutionscould be overlooked. It is therefore important to compare not just the TCO of different solutions, but the ROIdifferences as well (where ROI takes into account total cost of ownership versus benefits for each proposedsolution).The Bottom LineFor sellers, TCO is a requirement, assuring buyers that they are getting the best value solution – a requirementin today’s frugal environment.Alinean can help automate the calculation and presentation of TCO advantages for your solutions. Alineanworks with extensive proprietary research and your team to develop on-line self-service TCO Calculators andmore detailed sales driven TCO Comparison Sales Tools.Click here for more information on on-line TCO Calculators and TCO Comparison Sales Tools.