Total Cost of Ownership

Total Cost of Ownership (TCO Total Cost of Ownership ) is an accounting method to help consumers and businesses to assess all costs of capital goods ( such as software and hardware in the IT). The idea is to get a settlement, which contains not only the cost, but also all aspects of later use (energy costs, repair and maintenance ) of the respective components. Thus, known cost drivers or hidden costs may be able to be identified in advance of an investment decision. The most important basis for the further understanding of the TCO is the distinction between direct and indirect costs.

• 8.1 Notes and references

Origin

The consideration of costs that go beyond the purchase price, can be traced back to the year 1927/28, and was designed by Borsodi (1927) and Harriman ( 1928) mentioned in connection with the purchase and the supplier selection.

Models

In any form of calculation should be noted that there is a so -called best - practice approach. Unlike many other key figures from the field of economics there is this not a binding rule, standard or doctrine. This circumstance is due to the enormous technical and organizational heterogeneity of the ICT sector. Thus, there exist many different approaches to the calculation of the TCO. However, a benchmark based on the TCO may always be possible only on the basis of a uniform calculation method. The methodology of the calculation is usually based on the input of essential parameters of an IT organization within certain software tools, which are now offered by many consulting companies as well as by Gartner himself.

There are numerous models that have been published in the literature on TCO and LCC. Among them are models of associations such as the VDMA and VDI guidelines. In Geißdörfer et al. are compared with 20 models and evaluated, including the VDMA and VDI model and many other models of institutions, organizations and authors. The quality of the models is judged which of the following criteria they meet: consideration of quantitative and qualitative factors, the period and the present value, Overall Equipment Efficiency ( OEE), standardized cost categories and cost drivers, transaction costs, accuracy and risk of values ​​, depending on the variables used in the model cover different application areas ( purchasing, sales, etc.) and need for ABC / PKR as the underlying cost accounting system. The IT capability and internationality of the models is provided here. The model of the Gartner Group and the model DIN EN 60300-3-3 have thereby received the most points.

A new approach for the calculation of TCO based on quantitative and qualitative model building blocks and empirical data that allow for rapid deployment of the configured model is represented with Klaus Geißdörfer. This approach is flexible and therefore also very timesaving can be used in practice. The model is based on existing models and a comprehensive study of companies that TCO or LCC have already in use.

Distinction TCO and LCC

The related concepts of ownership and Life Cycle Costing (LCC ) are often mixed and not separated cleanly. LCC is simplified primarily used for capital goods in the industry. Here are the transaction costs of minor importance, since the operating and acquisition costs are many times higher. TCO on the other hand is used for example for small purchases (PC, software) consumption articles (screws, fat), services, etc., in which the transaction cost is not negligible.

Types of costs

Direct costs

Be divided into direct costs not cost centers ( such as cost of an IT employee ), but in processes whose cost can be calculated in principle by taxes imposed other cost centers. Typically, these costs are incurred in the procurement and management of IT assets. From the business point of view, direct costs identified by their budgetability. Thus, a long-term effect of these costs, regardless of whether in a positive or negative sense, to the company's success in principle detectable.

Direct costs using the example of a workstation:

• Acquisition costs for hardware and software ( depreciation or lease payments ), costs of maintenance contracts with suppliers or service providers and cost of IT infrastructure ( networks, servers ) ( Hardware and Software Costs)
• All processes in the field of administration and support (operation costs)
• Administrative expenses ( eg asset management, drafting of contracts, budget planning ), coordination of training for IT staff and end users ( Administration Costs)

Indirect costs

Indirect costs are not due to the acquisition or ensuring the operation of capital goods, but due to unproductive use by the end user. It always is on processes, transactions or situations which inhibit the end user in its productivity. Since these operations may differ for all end users, the measurability of such an operation is fundamentally problematic. Controversial, however, is the extent to which these costs for a company are cash or income, ie in the form of deposits or withdrawals affect the cash flow. According to Krcmar these indirect or non- budgeted costs amount to about 23-46 percent of total costs. Indirect costs using the example of a workstation:

• Application development: Development of custom applications ( for example, Excel spreadsheets, etc.. ) ( Application Development )
• Data management, and configuration of the desktop ( File and Data Management)
• Non - availability of the system under consideration ( including personnel costs and costs of lost business activities ( opportunity cost )) ( Down Time)
• Self-help and training opportunity (Casual Learning and Self - Support )
• Training in order to train the end user in a given application (Formal Learning)
• Support of another unsuspicious users ( peer support )

Criticism

Often imputed share of rent, energy costs and associated charges of a similar nature are not considered. Furthermore, there is currently neither in the literature nor in the trade press appreciable approaches to discuss the problem of imputed venture or the consideration of business risk associated with the TCO model obviously.

Another point of criticism is necessary to state that the TCO concept provides no methods for the determination of indirect costs through lost productivity. In practice it is also necessary to clarify whether (eg downtime of a server ) actually incurred by the failure of an investment property that cost.

The biggest deficit brings the TCO model but with it by providing no approaches how to improve the TCO, especially in the area of indirect costs, may actually be in profit or loss for the company. Once accepted, the downtime of all workstation can be reduced annually by an average of two hours to one hour, the TCO should decrease due to the half of the amount of the estimated downtime for indirect costs. From the financial point of view, should now distributed to different cost centers or however always result in the form of receipts, in the sum of the cash flow, a positive effect by exactly that amount. In practice, this amount is, however, in lower dimensions affect the cash flow as estimated in the TCO calculation. This is due to, among other things, the different importance of the workstation or another IT asset value for the company. In addition, Endanwenderoperationen differ even within an IT organization. This is solely due to the fact that each employee has varying levels of IT skills and it can more or less efficient to deal with hardware and software.

TCO considerations in industry

The TCO consideration in the industrial environment is now becoming increasingly important due to the increasing global competition. So TCO calculations are machines supplier in large-scale projects required in the course of the tender, but also for smaller machines Manufacturers internal TCO calculations are becoming increasingly important in order to increase the efficiency of the company.

For example, a valve island is more expensive compared to individual valves in the direct cost analysis for a company. However, the company saves money when the indirect costs are taken into account. Because the time required for the designer is producing at individual valves by the sequence of many individual steps such as searching and configuring, downloading, hole pattern, installation of the CAD model in the CAD assembly, creation and sharing of CAD models in the PLM system, etc. higher order multiples. The buyer and the warehouseman saves due to the strong reduction of the numbers also time for process steps, such as purchase orders, invoice management, receiving, incoming inspection, booking system and shelves at the storage space must be carried out only once. Finally, you can still save time during assembly.

Without the TCO approach is for an industrial company that is a lesser incentive to invest here, because only this approach shows the potential for optimization and cost reductions.

More information

On behalf of the Federal Strategy Unit for computer science (ISB ) in Switzerland was developed by the PHW Business School, a Java -based software for the calculation of the TCO.