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Understanding Total Cost of Ownership

Total cost of ownership is difficult to measure. So much so that we don’t believe any business really knows the total cost of ownership (TCO) of any of their physical assets. Least of all their IT hardware.

Calculating Total Cost of Ownership

Calculating TCO is very important to knowing, managing and reducing your operating costs. For our purposes, in looking at the cost of IT hardware, total cost of ownership (TCO) includes the purchase cost (P), acquisition costs (A), installation costs (In), implementation costs (Im), operating costs (O), maintenance costs (M) and disposal costs (D). Subtracted from that is the book value of the asset (V).

So a simple TCO formula is:

P + A + In + Im + O + M + D – V = TCO

Additional Costs

But, many of those costs and value involve additional cost. For example, your acquisition cost can include product research. Your operating costs can include insurance. And your maintenance costs can include downtime.

One More Cost

Calculating TCO for all your IT hardware, other physical assets and even your business services and processes, like the cost of generating sales leads, can be time consuming. And that can make the TCO process itself a cost of ownership.

How to Use TCO to Improve Your Business

By understanding TCO, you can make more informed decisions around purchases or their options. If you are replacing a piece of IT hardware with a newer version of an existing model, many of your costs may not be as high as purchasing an entirely new piece of equipment.

In addition, if you are indeed installing new systems, you can know the point at which it goes from making sense to purchase, to making sense to look for alternatives to ownership.

Alternatives to Ownership

With the advent of cloud computing, software-as-a-service (SaaS) has become a popular option for businesses. It allows them to quickly and more economically take advantage of the latest applications.

Instead of incurring the costs of acquiring and maintaining licenses to standalone versions of software, businesses can simply subscribe to a SaaS option.

Hardware as a Service – HAAS

More recently hardware-as-a-service has applied the SaaS model to IT hardware. The first and one of the biggest advantages of HAAS is the reduction in TCO. In one-time capital expenditures alone, a business can realize bottom-line enhancing savings.

But the downstream advantages are very attractive too. A major drawback of acquiring technology is keeping it state-of-the-art. It always seems like as soon as its been implemented, there’s something better on the market.

HAAS lets you regularly update your equipment so your operations enjoy the advantages of the latest innovations. And when you combine your HAAS option with a service program, suddenly many, if not all, of your IT headaches disappear.

Downtime is drastically reduced. And all your typical TCO costs – including purchase, acquisition, installation, implementation, operating, maintenance and disposal – are whittled down to a single line item.

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