What Is the Total Cost of Ownership and Why Is It Important?

Many vendors offer products that claim to give you the best products and also products: but that does not mean that you will get the best product for free. If you check the fine print, you will realise that these so-called free products can cost you more than a paid service. This is because free products generally come with limited features, and in order to use the relevant features, you end up paying a hefty amount. Or, even worse, you pay with your personal data.

The exception here is free and open-source software. Software such as LibreOffice (document editor), GIMP (image editor) or Corteza are completely open and 100% free. Costs that influence the Total Cost of Ownership here are defined by if you need professional support or, in the case of Corteza, hosting (you can host Corteza yourself, but if you don’t want to, you can outsource this). So, what is  Total Cost of Ownership?

What does “Total Cost of Ownership” mean?

The Total Cost of Ownership, or TCO, is the comprehensive overall cost estimate of a particular solution. This includes the purchase price and the cost of operation over the asset’s lifespan. Conducting a TCO analysis can help your business make an informed decision before investing in a particular asset.

Before choosing to use a specific solution, it is extremely important to calculate and determine any direct or indirect costs associated with ownership of the said asset. Businesses usually use TCO to gauge how viable the acquisition of an asset or investment will be in the long run.

Why Total Cost of Ownership (TCO) is important:

1) Better long term financial performance

Knowing the upfront cost of acquiring an asset is relatively simple. However, subsequent hidden expenses can be much harder to anticipate. A TCO analysis can help your business understand the various indirect expenses of asset ownership such as maintenance fees, employee training costs, licensing fees and warehousing.

By first gaining insight into the overall financial effect of the purchase before acquiring a particular asset, your business can better understand the financial expense associated with the asset’s life cycle. This can benefit your business by producing a better ROI and improving your business’s overall long term financial performance.

2) Ongoing costs

Indirect expenses don’t just include one-time fees such as employee training or installation charges but also ongoing expenses that continue throughout the asset in question’s life cycle. This can include upgrade fees, repairs, maintenance charges and storage facilities. If these various expenses are not determined and taken into account before purchasing the asset, financial savings derived from the ownership of the asset may be squandered.

3) Training and implementation costs

In asset implementation, it is extremely important for your business to factor in costs related to administrative employee training and licensing. By also incorporating industry-specific expenses into your TCO calculations, your business will be able to obtain a much more accurate picture of the total acquisition expense of an asset.

4) Comparison of competitive bids

When you acquire a solution, you may be tempted to buy from the bidder with the least upfront price. However, by conducting a TCO analysis, you can validate different competitive sellers’ prices by factoring in indirect expenses of ownership. The lowest upfront price does not always signify the lowest cost of ownership. Therefore, you can use TCO to calculate the total cost of asset acquisition from multiple sellers and subsequently determine which one is the most reasonable choice for your business.

The Total Cost of Ownership of Open-Source solutions

While there were a lot of critical voices about open-source software having a high Total Cost of Ownership, like in this presentation from 2008, times have changed. Open-source software is now easier than ever to deploy (for example with the open-source solution Docker) and use. A clear example is the free and open-source low-code platform created by Crust. It’s fully featured, easy to deploy, a breeze to maintain and provides an excellent user experience. The TCO is low, and there is no lock-in. So, try it out for yourself!