TOTAL COST OF OWNERSHIP

PROJECT REPORT
ON
TOTAL COST OF OWNERSHIP

SUBMITTED TO:

SUBMITTED BY:

Prof. Vikas

Pankaj

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TOTAL COST OF OWNERSHIP

Table of Contents
1. 1 Brief Introduction ............................................................................................................................. 3
1.1.1 Background .................................................................................................................................... 3
1.2 TCO Tool ............................................................................................................................................ 3
1.3 Scope & Applicability of TCO tool ..................................................................................................... 4
1.3.1 Computer & Software Industry .................................................................................................. 5
1.3.2 Transportation Industry ............................................................................................................. 5
1.4 Stepwise & systematic application of tool ........................................................................................ 6
1.5 Case Study ......................................................................................................................................... 6
2.1 TCO Tool using Excel ......................................................................................................................... 8
2.1.1 Instruction manual for using TCO tool ....................................................................................... 8
2.1.2 TCO calculator sheet .................................................................................................................. 8
2.2 TCO Tool testing .............................................................................................................................. 11

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1. 1 Brief Introduction
Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine
the direct and indirect costs of goods, services or construction works over the whole of their life. Its
the combination of the purchase price plus all other costs you will incur, less any income you
receive.
It is a philosophy, methodology, and tool for analysing all the relevant quantitative and qualitative
costs of an acquisition, project, investment, or relationship in order to make a decision.
It looks beyond the purchase price of a part, subassembly, asset, investment, project, and/or a
service. It seeks to understand short and long-term costs and benefits of purchase to be made as
well as looks into customer and/or supplier relationships to determine their value to the
organization.

1.1.1 Background
1. Late 1700s -- Evolved from concepts of investment capital and diminishing returns (Quesnay
and Turgot), and Wealth of Nations (Smith) e.g., efficiency, productivity.
2. Late 1700s -- French Revolution Napoleons engineers paid attention to issues like
effectiveness, movement, repair and longevity of cannons.
3. 1929 Manual of American Railway Engineering Association, in the event there is a surplus
of power, then the total cost of ownership should be multiplied by the ratio of the cost of
repairs to the total.
4. 1939 Principles of Engineering Economy includes references to TCO
5. Late 1960s TCO was a term used at UNIVAC (UNIVersal Automatic Computer)
6. 1967 Ad in NYTimes lists total cost of ownership as a crucial skill for a Support Systems
Life Cycle Cost Analyst for the aerospace industry.
7. 1968 -- Review in Quality Progress notes, Total cost of ownership is being used profitably in
the elevator industry.
8. 1976 -- Journal of Finance article, Leasing, Buying, and the Cost of Capital Services,
discusses the total cost of ownership for production machinery.
9. 1995 -- Technology article in the NYTimes mentions total cost of ownership. Its called
The Executive Computer; A Dinosaur in Open Systems Clothing and its about the AS/400.
10. TCO was popularized by Bill Kirwin of the Gartner Group in 1987 as a means of clearly and
reasonably addressing the real costs attributed to owning and managing an IT infrastructure
in a business.

1.2 TCO Tool

Total Cost of Ownership (TCO) modeling is a tool that systematically accounts for all costs related to
a management decision. TCO includes all costs, direct and indirect, incurred throughout the life
cycle of an asset, including acquisition and procurement, operation and maintenance and end-of-life
management. TCO Calculator Tool allows users to compare the costs of different options for the life
cycle management of equipment with an emphasis on decisions that may have an environmental
impact.

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TCO tool incorporates all direct and indirect costs related to the equipment under consideration.
These can include1. Purchasing cost It can be related to acquisition cost of hardware or software or both,
service contracts, administration cost, setup and installation cost. This cost could vary based
on the number units being purchased.
2. Expected Service life- Cost of acquisition and service of equipment would vary based on
years of service life that particular equipment holds.
3. Operations & maintenance cost- This includes the training cost imparted to end user
including formal and informal assistance. Apart from this, maintenance & technical support
cost is another factor that is included and varies depending upon the number of units.
4. Unit Energy consumption cost Depending upon the per unit price of electricity and units
being consumed for equipment being purchased, this is another cost factor that is
considered in the total cost of ownership.
5. Equipment upgrade- Up gradation of hardware, software and staff resources is another cost
factor being considered in the TCO tool.
6. Product disposition- This includes all the costs involved in product disposal post usage life of
product. It also adjusts the revenue earned upon disposal.
Based upon all these cost factors taken into consideration by TCO tool, final cost of acquiring the
equipment is calculated and further analysed to make final decision about purchasing the
product.

1.3 Scope & Applicability of TCO tool

The concept of TCO is easy to understand in terms of goods, such as buying cars or leasing printers.
It can also apply to services such as a building maintenance agreement or providing training. Thus in
terms of scope of TCO it can be applied across industries- be it services oriented or it is products
oriented industry.
TCO can be used at various stages in procurement, such asa. in a business case to assess the costs, benefits and risks associated with the investment
b. when assessing different business models, maintenance options or solutions on a
comparable cost basis
c. to understand the different cost drivers in the life of a procurement
d. by a supplier when bidding for a contract to demonstrate the total benefits and value being
offered especially where the initial purchase price is higher than competitors, but the total
cost of ownership is lower
e. in selecting the best supplier by assessing the comparative whole-of-life costs of competing
bids
f. in managing the contract to track actual expenses and income against budget
g. as part of a benefits realisation exercise.
Also, an enterprise may use it as a product/process comparison tool. It is also used by credit
markets and financing agencies.

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1.3.1 Computer & Software Industry

TCO tries to quantify the financial impact of deploying an information technology product over
its life cycle. These technologies include software and hardware, and training. Technology
deployment can include the following as part of TCO:

Computer hardware and

programs

Operation expenses

Long term
expenses

Network hardware and software

Infrastructure (floor space)

Replacement

Server hardware and software

Electricity (for related

equipment, cooling,
backup power)

Future upgrade or
scalability
expenses

Workstation hardware and

software

Testing costs

Decommissioning

Installation and integration of

hardware and software

Downtime, outage and

failure expenses

Purchasing research

Diminished performance
(i.e. users having to wait,
diminished money-making
ability)

Warranties and licenses

Security (including
breaches, loss of
reputation, recovery and
prevention)

License tracking - compliance

Backup and recovery

process

Migration expenses

Technology training

Risks: susceptibility to
vulnerabilities, availability of
upgrades, patches and future
licensing policies, etc.

Audit (internal and

external)
Insurance
Information technology
personnel
Corporate management time

1.3.2 Transportation Industry

TCO concept is widely used in the transportation industry. For example, the TCO defines the cost of
owning an automobile from the time of purchase by the owner, through its operation and
maintenance to the time it leaves the possession of the owner. Comparative TCO studies between
various models help consumers choose a car to fit their needs and budget. Some of the key elements
incorporated in the cost of ownership for a vehicle include:

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Depreciation
costs

Fees and taxes

Fuel costs

Maintenance costs

Insurance

Opportunity costs

Financing

Downtime costs

Repairs

1.4 Stepwise & systematic application of tool

In order to make the systematic application of TCO tool, there is a 5 step process that should be
followed in order to apply this tool efficiently. Following process explains this process clearly:

Step 1

Step 2

Step 3

Step 4

Determine desired benefits of TCO

Form a team to work on TCO project

Identify relevant costs and gather data

Fine tune TCO approach, incuding sensitivities

Present recommendations to top management, implement

Step 5 and continously improve

1.5 Case Study

The overall concept of Total Cost of Ownership for server clusters has been an important issue
within the IT community for many years. Numerous studies and customer experiences have proven
that purchase price alone is not an adequate measurement to compare server clusters from
various vendors. Other factors, including the costs to manage and maintain the servers, as well
as the application availability they provide, usually have a greater financial impact on an organization
than just the system's purchase price. Recognizing these factors, TechWise Research developed
an analytical approach in 1999 called Reliability-Adjusted Total Cost of OwnershipTM that
incorporates management costs and application availability in the TCO analysis. As part of this
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analysis, server clusters from different manufacturers are compared in terms of the actual number of
downtime hours per year that customers typically experience. These downtime findings are then
converted into a monetary measurement of the cost differences between clusters which TechWise
Research refers to as the "Availability AdvantageTM."
In the past year, the issue of data security and application availability has moved from the realm of
the IT manager into the corporate boardroom. Several high profile viruses and worms resulted in
excessive Internet traffic bottlenecks and downtime during 2003. For this reason, TechWise
Research expanded its proprietary Reliability-Adjusted TCOTM technique to incorporate downtime
caused by software viruses and worms.
This study focuses on the following three entry-level and mid-range server clusters: HP OpenVMS/
AlphaServer, IBM AIX/pSeries, and Sun Solaris/Sun Fire clusters. In the Fall of 2003, TechWise
Research interviewed a total of 94 IT professionals in U.S. firms. The purpose of these interviews
was to collect data on the operational costs associated with installing, managing, and maintaining
their clusters. Information was also collected on the number of hours and associated costs for
various downtime events each company experienced over a twelve-month period. All of these
operational data were then combined to calculate the Reliability-Adjusted TCOTM - an analytical
approach that factors downtime costs/rates into the TCO analysis. TechWise Research included
four main cost components in the TCO analysis. These are the costs to
(1) Buy the servers and service contract
(2) Install and configure the cluster
(3) Manage and maintain the cluster over three years, and,
(4) The costs associated with application downtime over three years.
Three different cluster configurations (2-way, 4-way and 12 to 16-way systems) were analyzed for
the three platform brands. For each configuration, the Reliability-Adjusted TCOTM was calculated
at various downtime costs to allow readers the ability to compare the different platforms at a
downtime cost rate that most applies for their firm.
For entry-level 2-way clusters, the acquisition costs (list price of the servers and service agreement)
only represent 7% of the three-year TCO. As the clusters increase in complexity to a 4-way, then to a
12 to 16-way cluster, acquisition price represents a larger portion of the TCO, specifically 22% and
26%, respectively. However, regardless of configuration, the vast majority of the total cost of
ownership is due to management and downtime costs. In terms of downtime, nearly half of the
study's respondents report that their company loses as least $10,000 for each hour their cluster is
down. The average cost per hour of downtime is $145,000. For all three configurations (2, 4 and 12
to 16-way), the brand offering the lowest TCO changes depends on the cost per hour of downtime.
In all three cases, when there are no costs associated with downtime, Sun Solaris/Sun Fire clusters
offer the lowest TCO of the three brands tested. As the cost per hour of downtime increases, Sun
loses its TCO lead to HP OpenVMS/AlphaServer clusters. The "cross-over" point, where Sun loses its
"best in class" TCO status to HP, varies for the three configurations. For 2-way clusters, HP has the
lowest TCO when downtime costs are more than $1,585 per hour. For 4-way clusters, HP offers the
lowest TCO for downtime costs greater than $8,004 per hour. Lastly, for 12 to 16-way clusters, HP
offers the lowest TCO when downtime costs are greater than $18,251 per hour. In all three
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configurations, IBM clusters' TCO falls between HP and Sun - with one exception. IBM has the
highest TCO for 2-way clusters when downtime costs are less than $7,000 per hour.
Sun's TCO advantage at low hourly downtime rates can be attributed to the fact that Sun clusters
have a lower list price than comparable clusters from HP or IBM. HP's TCO advantage at higher
hourly downtime rates can be attributed to HP averaging the fewest hours of downtime for five of
the seven causes of downtime tested. HP demonstrated a substantial Availability AdvantageTM in
the areas of crashes caused by software viruses/worms and end-user applications.

2.1 TCO Tool using Excel

The TCO tool has been designed using MS-Excel and it can accommodate maximum 2 products for
comparison and not more than that.

2.1.1 Instruction manual for using TCO tool

Following image gives the detailed information about how to use the TCO calculator to compare
costs for 2 products.

2.1.2 TCO calculator sheet

There are total nine sections in the calculator for which costs of two products (Product A and
Product B) has been calculated. There are sub-sections for each of the respective sections whose

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value is to be entered to arrive at the final Total cost of Ownership. Based on the final costs obtained
the final decisions could be taken in purchasing the equipment.
Following images give the clear view of the TCO tool that has been designed to calculate the costs on
$/unit basis for both Product A and Product B. All the costs mentioned in the TCO tool have to be
added and the revenue generated from re-sale of the Product A and Product B has to be subtracted
from the cost obtained to obtain final total cost of ownership for respective products.

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2.2 TCO Tool testing

TCO tool has been tested by taking values for both Product A and Product B. These values are costs
assigned to various parameters being considered for calculating the Total cost of ownership for both
the products on random basis. Following table enlists the values of costs assigned to both the
products A and B and has been used to calculate the total cost of ownership.

S.No.

Product A

Product B

1500
1000
800
700
350
4350

1750
1200
1000
600
400
4950

$/unit

1000

1300

$/unit
$/month
$/unit

500
800
2300

450
800
2550

$/unit

600

550

$/unit

1000

1200

$/unit

650

800

$/unit

500

450

$/unit

2750

3000

$/unit
$/month
$/unit

250
1500
1750

250
1500
1750

$/unit

500

650

$/unit
$/month
$/month

100
700
850

150
700
850

$/month

1000

1000

$/unit

3150

3350

VARIOUS COST FACTORS

Purchasing Cost (Initial Equipment Cost)

Pilot/development cost
Initial licensing
Legal costs
Packaging & delivery costs
Installation & testing
Subtotal Initial Cost

$/unit
$/unit
$/unit
$/unit
$/unit
$/unit

Operations & Maintenance Cost

2

Scheduled overhaul/
replacement of parts
Regular inspection cost
Labour cost
Subtotal Cost
Technology Upgrade

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Upgrading existing systems

Adding new technology to
system
Replacement of custom-built
Disposal of obsolete
components
Subtotal Cost
Facilities
Rental of space
Project manager cost
Subtotal Cost
Training & Education
Development of training
module
Printing material
Contracting a trainer
Hire of venue
Refreshments, meals &
transport
Subtotal Cost

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Resale value
Salvage value
Subtotal Cost
Disposal Cost
Decommissioning cost
Transportation cost
Fees for disposal in case
dangerous
Cost of interim arrangements
Site clean up
Subtotal Cost
Opportunity Cost
Tangible- loss of income
Intangible- loss of particular
functionality
Subtotal Cost
Re-tender Cost
Staff time to RFP
Time of other staff to review
documents
Cost of document
Subtotal Cost

$/unit
$/unit

850
850

900
900

$/unit
$/unit

350
250

400
300

$/unit

140

140

$/unit
$/unit
$/unit

100
150
990

100
150
1090

$/unit

1500

1700

$/unit

700

800

$/unit

2200

2500

$/unit

750

800

$/unit

600

600

$/unit
$/unit

450
1800

500
1900

Based on these values of cost inserted the tool, TCO calculator incorporates all the values- cost and
revenue generated from disposal and gives the final Total Cost of Ownership (TCO) value for both
the products A and B. On the basis of these obtained values, the analysis would be made that further
helps in making decisions.
Following is the final Total Cost of ownership obtained for both the products A and B:

TOTAL COST OF OWNERSHIP

$/unit

PRODUCT A
18440

PRODUCT B
20190

Here, total cost of ownership for product A is $ 18440/unit which is less than product B. Thus,
applying TCO tool helps us in identifying all the costs involved in acquiring the respective product
and maintaining it over the period of time till its shelf life comes to an end. Using this tool,
management will be able to take a better calculated decision by considering all the costs involved in
handling either of the products with respect to revenue generated by the equipment (product A or
product B) over the period of time and make its final call in procuring the equipment.

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