Cloud Computing - Total Cost of Ownership (TCO)

Overview

Total Cost of Ownership (TCO) is a technical evaluation standard often adopted by companies. Its core idea is the total cost including acquisition cost and annual total cost within a certain time range. In some cases, this total cost is an average of costs over a period of 3 to 5 years to obtain comparable current expenditures.

In summary, TCO is the cost of retaining and maintaining all software within the company.

Introduction

Almost all institutions or enterprises can not do without cost budget in the process of informatization, especially in the investment of it projects, which requires a scientific and reasonable value evaluation method. The theme of this paper - total cost of ownership (TCO) is such an economic evaluation mechanism established in the process of completing this task.

Concepts of TCO

The authority Gartner defines the TCO as: TCO is the holistic view of costs across enterprise boundaries over time。TCO is a quantitative means for understanding the qualitative performance of the IS organization。TCO is a comprehensive set of methodologies, models and tools to help IS organizations better:

• Measure costs
• Manage costs
• Reduce costs
• Improve overall value of IT investments
• Align IT support to the business mission

Total cost of ownership (TCO) is often an important part of the IT strategy of an organization. It is a technical evaluation standard often adopted by a company. Its core is to evaluate the total cost, including acquisition cost and annual total cost, owned by an enterprise within a certain time range. Compared with the simple calculation of return on investment (ROI), the calculation of total cost of ownership often focuses on long-term and in-depth analysis, so it has become one of the most effective tools for storage economic evaluation. In some cases, this total cost is an average of costs over a period of 3 to 5 years to obtain comparable current expenditures. Specifically, we can evaluate the TCO value from the following specific aspects:

Accounting of TCO

Total cost of ownership accounting generally consists of two parts: technology and business. The technical cost includes the cost of hardware, software (including maintenance and upgrading), installation and training, as well as the manpower expenses such as operation, support and consultation.

Business costs involve financial issues related to availability, performance and recovery. Availability also includes the benefits brought by the improvement of availability and the costs paid by the unavailability of data. The commercial benefits brought by the improvement of availability include the benefits related to the solution, the saved human resource costs and the productivity improvement brought by the new investment. Performance factor is to evaluate the contribution of performance to data availability. The calculation method for performance improvement is not to calculate the one-time benefits, but to calculate the benefits that increase continuously over time.

Recovery cost refers to the time and money spent to recover to normal operation once the storage facility fails. It also includes the resulting loss of business value and the impact on productivity, as well as other miscellaneous expenses.

It is very useful for companies of all sizes to consider it costs through total cost of ownership. This means that we have not only seen the hardware cost of end users, but also considered all the related costs that will be brought:

• Additional asset costs - software, it support software and network architecture.
• Technical support cost - hardware and software deployment, technical support personnel, system maintenance.
• Management cost - Finance, supplier management, user training, and asset management.
• End user operating costs - downtime costs, user support and expensive it technician support.

Pros & Cons of TCO

Pros

The outstanding advantage of TCO is that it provides a powerful cost estimation method when people are not clear about the possible future cost of a project at the initial stage of purchase. However, since this estimation method only focuses on the cost, such companies that rely on TCO will eventually adopt the strategy of minimizing the expenses, instead of considering how to maximize the return. For this reason, these companies may purchase the cheapest application software, and rarely choose the application software that can have the greatest impact on the minimum requirements of the company.

In most cases, calculating the total cost of ownership is a process that requires continuous efforts. It needs to consider both technical and non-technical factors. If you want to have a complete understanding of the continuous cost of the relevant application software, it is best to calculate TCO over a period of at least 3 years. All costs including software and hardware costs, as well as consulting and related support costs in the preparation work before the software is actually launched, shall be taken into account when calculating TCO. After the software is really launched, the maintenance and upgrade costs in the following years, as well as the costs of training users and it support, must also be considered.

The annual TCO figure of each year is an excellent indicator of the current cost situation, and can be well used to achieve the budget objectives and be well used on budget oriented projects. Compared with other similar methods, the average TCO value over a period of time provides a more reasonable standard. However, the average TCO cannot provide insight into the timing of costs. We find that the products with low input cost and high input maintenance are more attractive than those with high input cost and low input maintenance. However, through analysis over a period of time, the two types of products are similar in TCO, with little difference.

Cons

The problem with total cost is that since it is used in isolation, it only provides a very narrow approach to the cost of a certain application. TCO doesn’t consider profit at all. What you care about is not only choosing the cheapest application software, but more importantly, you should consider choosing the application software that can bring the most profit or return to the company.

Similarly, TCO cannot help you optimize the project, because optimization based on the lowest cost will mean never investing in the project. On the contrary, optimization requires the company to weigh various factors in cost, income and investment risk before finally deciding how to take the first step.

In terms of finance, there are no disciplinary problems such as corruption. Every company should have a clear understanding of the continuing costs of every technology investment they make. Because TCO can easily get the cost and has a specific figure for making decisions based on less expenditure, many companies and analysts have paid attention to TCO as an important specific standard. However, technology can have a great impact on the bottom line. Looking at the TCO situation where all the costs and benefits have exceeded, it can help you determine that although the solution you adopt is not the cheapest solution, it is the best solution for your company.

Summary

It can be seen from the above analysis that TCO has its advantages and disadvantages. TCO does not involve any financial discipline, and through TCO, every company can know the current cost of investing in each technology. It is precisely because TCO can provide enterprises with visible and tangible figures that many companies regard it as a basic technical evaluation criterion. With TCO, enterprises can easily see the cost flow and make decisions on the basis of the lowest possible expenditure. However, we must be clear that technology has a significant impact on the minimum requirements of enterprises. We should not be limited to TCO methods. We should consider all factors, including cost and income, to ensure that the selected solution is not necessarily the cheapest, but must be the best.