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TCO stands for Total Cost of Ownership, which is a formula designed to calculate the total cost of an asset, product, or service. This tool optimizes financial investments by considering not only the acquisition price we paid for something, but also all other associated costs throughout its lifecycle, including maintenance, upgrades, training, and more.
For instance, think about the costs related to a process management platform. You’ll need to factor in implementation, operation, and maintenance costs throughout the software’s entire lifespan. The sum of all these costs represents the TCO, reflecting the total value invested from purchase to disposal.
Understanding the total cost of ownership and learning how to calculate it efficiently is a great way for your business save money and increase overall efficiency.
What Is TCO?
TCO is a calculation performed to estimate the total expenses associated with a particular asset. It measures all money spent on acquisition, implementation, use, and disposal or discontinuation of a product or equipment. Its purpose is to provide a comprehensive view of any given asset and its value over time, serving as a basis for comparing costs and return on investment (ROI).
TCO can be calculated by summing the initial purchase price and the operating costs over the asset’s entire lifespan. For businesses, TCO does not just focus on short-term costs but emphasizes long-term value. The lower the total cost of ownership, the better the asset’s value over time.
This calculation is crucial for all business strategies, such as choosing suppliers and allocating resources to optimize processes. It also provides evidence to compare alternatives and facilitate negotiations, like discounts or additional benefits.
What Should Be Included in TCO Calculation?
Several factors should be included in the total cost of ownership calculation, encompassing both direct and indirect expenses. Even intangible assets can be assigned a value to be included in the calculation. In summary, all costs and expenses incurred from purchase to disposal need to be considered.
When discussing a process management platform, for example, numerous benefits are gained throughout its lifespan, particularly in productivity, performance, and value engineering. The acquisition of such resources should include costs for implementation, training, customization, maintenance, operation, integrations, licenses, and more.
To calculate TCO accurately, consider the costs of necessary machinery for the software to function, along with internet, electricity, downtime, and other related expenses. Only after gathering all this data and performing the calculations will you be able to determine if the investment will provide sufficient benefits to justify the purchase.
Calculating Total Cost of Ownership
The calculation involves summing all related costs over a specified period. The formula would be:
TCO = acquisition cost + (sum of all related costs and expenses x years of useful life).
If the item can be resold later, the potential resale value should be subtracted from the final TCO.
For illustration, let’s consider a process management platform with the following average values:
- Initial implementation cost: $10,000
- Training: $350
- Customization: $3,500
- Cloud storage: $2,500
So if this platform version’s lifespan is 5 years, the total cost of ownership would be:
TCO = $10,000 + ($6,350 x 5 years)
TCO = $49,250, or an annual cost of $8,350.
There are some challenges in calculating TCO, such as difficulties in defining standards and the scope of operational costs, especially when it comes to elements that may be overlooked, like training or depreciation.
Another consideration is the volatility of supplies or parts that may be needed. It’s nearly impossible to predict what may be required or the future prices of these supplies. Additionally, the cost of updates, particularly regarding technology and software, should not be overlooked, as a vendor may discontinue a service or cancel a feature, potentially raising the TCO significantly beyond initial estimates.
Acquiring a Process Management Platform
Adopting a process management platform is a strategic decision that involves investments, operational efforts, and value generation. There are various solutions available with different functions and configurations. TCO is an excellent method to measure which option will provide the best cost-benefit ratio.
Neomind’s Fusion Platform is a comprehensive solution for managing processes, documents, indicators, risks. Additionally, it offers native electronic signing capabilities and a host of other business-empowering features. Being a low-code and fully customizable solution, it is very cost-effective, since employees can create process flows or forms that meet their demands without needing IT assistance.
Remember that choosing a platform for your business should consider long-term evolution. The goal is for your business to continue growing. Therefore, the solution must not only meet immediate needs but should also provide features that keep pace with your company’s development for years to come.
Imagine how costly the TCO would be if you had to switch solutions before the end of its useful life simply because the functionalities no longer meet your needs. That’s why Neomind continuously seeks feedback from clients and develops new features tailored to each business’s specific needs.
Take the opportunity to try Fusion Platform while calculating itstotal cost of ownership, and see for yourself why this is the best option for your business.