I have been doing a fair amount of work on TCO and ROI recently for some of our clients, I thought that IT had a lot of three letter acronyms!
Total Cost of Ownership (TCO) analysis is intended to determine the lifetime costs of acquiring, operating, and changing something. It is primarily used to compare apples to apples in large capital investments, and, if done properly, can bring out hidden costs of ownership.
TCO to Support Vendor Claims
Although the concept has been around forever, TCO has become important in IT since the 90s. In the 90s in an effort to protect its Windows revenue, Microsoft commissioned several TCO white papers and studies (none definitively conclusive) to offset Linux claims of being “free.” This tactic of using TCO analysis to win favour is being revived by the cloud vendors.
Developing Your Own TCO Methodology
If you use external benchmarks, you know that it can be difficult to map the author’s framework to your own. It is the same with vendor TCO models. So, we recommend that you develop your own or seriously analyse the workings of the authors tools you are working with, so that you know what's in it and that it meets your specific needs. With it as your reference point, you can then map in individual vendors and do custom analysis for yourself.
A typical breakdown of the three buckets of costs that would go into a TCO model are:
The biggest challenge with TCO modelling is the allocation of the operating cost to the asset. .
Don’t Forget the Change Costs
Where clients are less consistent in how they account for costs, or where they overlook them altogether, is within the change bucket. The costs needed to make an asset operational continue to be underestimated by 20-30% on average. The costs to enhance or upgrade an asset are often neglected in a TCO analysis.
So, as the cloud debate continues in your organisation, or you just need some solid TCO analysis, be sure you are armed with your own model, not just the one that is provided to you by your possible software vendor.