Database Reference
In-Depth Information
3.1.8 Total Cost of Ownership (TCO)
Total cost of ownership (TCO) is simply the sum total of all associated costs relating to the
purchase, ownership, usage, and maintenance of a particular product. As with any consumer
product—let us say an automobile—there is the end-user cost or the purchase price, and then
there are the costs associated with tires, oil, fuel, batteries, and so on over the useful life of the
automobile. Similarly with investments in IT infrastructure (hardware, networking, data center,
etc.) and applications (enterprise packages, databases, data warehouses, office productivity applica-
tions, etc.), there are costs associated with ownership that are over and above the initial purchase
price. There are costs for hardware and software maintenance (the costs paid to the vendor for
ongoing support, bug fixes, upgrades, and case escalations.) There are costs for power to run and
cool servers, storage, and network hardware in the data center. There are also the costs associated
with internal support and break-fix activities (also known as moves, adds, and changes [MAC]).
Depending on the type of investment, it may be either be expensed or capitalized. Small
tools and noncapital expenditures under a certain threshold (usually $3,000-$5,000) are typically
expensed and are not depreciated over their useful life. Items such as fiber and copper cables often
fall into this category. Larger, more expensive items—such as disk storage, servers, tape libraries,
switches, routers, computer room air chillers, and so on—are considered fixed assets (FA), and are
capitalized, and thus depreciated over their useful life. If an asset is depreciated, the depreciation
expense should be included in the TCO analysis.
Generally accepted accounting principles (GAAP) recognize multiple methods of
depreciation, including straight-line, declining, sum of the years' digits, and double-
declining. For the purposes of our examples, we use straight-line depreciation only,
purely for ease of use.
For a basic example of TCO analysis, consider a disk storage unit that costs $1,000,000 and
has a useful life of three years. Using the straight-line depreciation method, the depreciation
charge for this unit would be $333,333.33 per year. Additionally, there is a maintenance contract
with the vendor for $100,000 annually. The physical footprint of the device equals four tiles in the
data center (which we know from our facilities management firm costs $10,000 a year, including
power and cooling charges). Finally, the MAC associated with provisioning storage for our clients
requires one full-time equivalent (FTE) storage engineer at $150,000 annually.
Item
Annual Charge
Three-Year Charge
Disk storage
$333,333.333
$1,000,000.00
Maintenance
$100,000.00
$300,000.00
Facilities
$10,000.00
$30,000.00
FTE labor
$150,000.00
$450,000.00
Total
$593,333.33
$1,780,000.00
Thus, for this simplified example, the TCO is $593,333.33 annually and that the TCO over the
lifetime of the product is $1,780,000.00.
