Total cost of ownership
Total Cost of Ownership ( TCO ) is a billing method that is intended to help consumers and companies to estimate all the costs incurred for capital goods (such as software and hardware in IT ). The idea is to receive an invoice that not only includes the acquisition costs , but all aspects of the subsequent use (energy costs, repair and maintenance ) of the components concerned. Well-known cost driversor hidden costs may be identified in advance of an investment decision. The most important basis for a further understanding of TCO is the distinction between direct and indirect costs.
The consideration of costs that go beyond the purchase price can be traced back to 1927/28 and was mentioned by Borsodi (1927) and Harriman (1928) in connection with purchasing and supplier selection.
In any form of calculation, it should be noted that it is a so-called best practice approach. In contrast to many other key figures from the field of economics, there is still no binding regulation, standard or teaching opinion. This fact is due to the enormous technical and organizational heterogeneity of the ICT industry . As a result, there are many different concepts for calculating the TCO. However, a benchmark based on the TCO can only ever be possible on the basis of a uniform calculation method. The calculation method is mostly based on the input of essential parameters of an IT organization within certain software tools, which are now offered by many consulting firms as well as by Gartner itself.
There are numerous models that have been published in the TCO and LCC literature . These include models from associations such as the VDMA and VDI guidelines. In Geissdoerfer et al. 20 models are compared and evaluated, including the VDMA and VDI models and numerous other models from institutions, associations and authors. The quality of the models is assessed according to which of the following criteria they meet: consideration of quantitative and qualitative factors, observation period and present value, Overall Equipment Efficiency (OEE), standardized cost categories and cost drivers, transaction costs, accuracy and risk of the values used, dependence of the variables in the Model, coverage of various application areas (purchasing, sales, etc.) as well as the need for ABC / PKR as the underlying cost accounting system. The IT capability and internationality of the models are required. The Gartner Group model and the DIN EN 60300-3-3 model received the most points.
A new approach to the calculation of TCO on the basis of quantitative and qualitative model modules and empirical data, which enable a quick implementation of the configured model, is presented by Klaus Geissdoerfer. This approach is flexible in practice and can therefore be used very quickly. The model is based on existing models and a comprehensive study of companies that already have TCO or LCC in use.
Differentiation between TCO and LCC
The related terms TCO and Life Cycle Costing (LCC) are often mixed up and not clearly delimited. In simple terms, LCC is mainly used for capital goods in industry. The transaction costs are of secondary importance, as the operating and acquisition costs are many times higher. TCO, however, is z. B. used for smaller purchases (PC, software), consumables (screws, grease), services, etc., for which the transaction costs are not negligible.
Direct costs are not divided into cost centers (such as the costs of an IT employee), but into processes, the costs of which can generally be calculated by allocating other cost centers. Typically, these costs are incurred in the procurement and maintenance of IT assets. From a business point of view, direct costs are characterized by their budgetability . Thus, a lasting effect of these costs, regardless of whether in a positive or negative sense, on the company's success can be demonstrated.
Direct costs using the example of a workstation computer:
- Acquisition costs for hardware and software ( depreciation or leasing installments ), costs from maintenance contracts with manufacturers or service providers and costs for IT infrastructure (networks, servers) ( hardware and software costs )
- all processes from the area of administration and support ( operation costs )
- Administrative expenses (e.g. asset management , drafting of contracts, budget planning), coordination of training measures for IT staff and end users ( administration costs )
Indirect costs do not arise due to the acquisition or the guarantee of the operation of capital goods, but due to unproductive use by the end user. These are always processes, procedures or situations that inhibit the end user in his productivity. Since these processes can differ for all end users, the measurability of such a process is fundamentally problematic. However, it is controversial to what extent these costs affect a company in terms of payments or income, i.e. affect the cash flow in the form of payments in or out . According to Krcmar, these indirect or non-budgeted costs amount to between 23 and 46 percent of the total costs. Indirect costs using the example of a workstation computer :
- Application development: Development of your own applications (e.g. also Excel tables etc.) ( Application Development )
- Data management and configuration of the desktop ( file and data management )
- Non-availability of the system under consideration (personnel costs or including costs for lost business activities ( opportunity costs )) ( downtime )
- Self-help and casual training ( casual learning and self-support )
- Training measures to train the end user in a specific application ( formal learning )
- Support of another inexperienced user ( peer support )
Often imputed shares for rent , energy costs and ancillary costs of a comparable kind are not taken into account. Furthermore, there are currently no noteworthy approaches, neither in the literature nor in the specialist press, to openly discuss the problem of imputed risk or the consideration of entrepreneurial risk in connection with the TCO model.
Another point of criticism is that the TCO concept does not provide any methods for determining the indirect costs due to productivity losses. In practice, it must also be clarified whether the failure of an investment object (e.g. downtime of a server) actually results in these costs.
However, the TCO model brings with it the greatest deficit, as it does not provide any approaches as to the extent to which an improvement in the TCO, especially in the area of indirect costs, can actually be effective for the company. Assuming that the downtime of all workstation computers can be reduced from an average of two hours to one hour per year, the TCO should be reduced by half the amount of the indirect costs estimated for downtime. From a financial point of view, there should now be a positive effect of exactly this amount, distributed over various cost centers or in the form of revenue, but always in total for the cash flow. In practice, however, this amount will affect the cash flow to a lesser extent than estimated in the TCO calculation. The reason for this is, among other things, the different importance of the workstation computer or another IT asset for the company's added value. End-user operations also differ within an IT organization. This is justified solely by the fact that every employee has different levels of IT knowledge or is more or less efficient at handling hardware and software.
TCO considerations in industry
The TCO consideration in the industrial environment is becoming increasingly important today due to increasing global competition. For example, machine suppliers in large projects require TCO calculations in the course of submitting offers, but internal TCO calculations are also becoming increasingly important for smaller machine manufacturers in order to increase efficiency in the company.
An example: A valve terminal is more expensive for a company compared to individual valves when looking at costs directly. However, the company saves money when the indirect costs are included. Because the time required for the designer for individual valves is due to the sequence of the many individual steps such as searching and configuring, downloading, generating drilling patterns, installing the CAD model in the CAD assembly, creating and releasing the CAD models in the PLM system, etc. many times higher. The buyer and the warehouse clerk also save time due to the significant reduction in material numbers, because process steps such as orders, invoice management, goods receipt, incoming goods control, system bookings and storage at the storage location only have to be run through once. Finally, you save time during assembly.
Without the TCO approach, an industrial company has less incentive to invest here, because only this approach shows the potential for optimization and cost reductions.
On behalf of the Swiss federal IT strategy organ (ISB) , the PHW Hochschule Wirtschaft developed Java-based software for calculating the TCO. As part of the publicly funded project “Pflege! E-mobil”, a total cost of ownership model for the use of electric vehicles in outpatient care services was developed. In addition, a total value-of-ownership model was developed which, in addition to the relevant cost categories, also takes various benefit categories into account.
The official definition by Bill Kirwin (Gartner Group) can be found at Gartner itself.
- Krämer, Stefanie: Total Cost of Ownership - Concept, Application and Significance in Procurement Management of German Industrial Companies . Saarbrücken 2007, ISBN 3-8364-1933-5
- Krischun, Sascha: Total Cost of Ownership: Significance for international procurement management . Hamburg 2010, ISBN 978-3-8366-3792-3
- Lisa M. Ellram , Sue Parrott Siferd: Purchasing: The Cornerstone of the total cost of ownership concept . In: Journal of Business Logistics , 14 (1), 1993b, p. 163
- Klaus Geissdoerfer, Ronald Gleich , Wald Andreas: Standardization potentials of life cycle-based models of cost management . In: Zeitschrift für Betriebswirtschaft 79, 2009, pp. 693–716
- Forecast model for the life cycle costs of machines and systems , VDMA 2006, Berlin
- VDI manual operating technology . VDI guideline, Association of German Engineers, Berlin 2005.
- Gartner Group (ed.): Measurement Distributed Computing Chart of accounts . Chart of accounts E-rev, 2003
- DIN EN 60300-3-3-2004 . German Commission for Electrical, Electronic and Information Technologies of DIN and VDE.
- Klaus Geissdoerfer: Total Cost of Ownership (TCO) and Life Cycle Costing (LCC): Use and models: A comparison between Germany and the USA . LIT-Verlag, 2009, ISBN 3-8258-1863-2
- H. Krcmar: Information management . 4th edition, Springer, Berlin et al., 2005, ISBN 3-540-23015-7 ; 1998, p. 182
- The open source software is available at SourceForge.net .
- Care! E-mobile. Retrieved January 6, 2020 .
- T. Görzen, C. Meier, D. Kundisch: A total value-of-ownership model for evaluating electrified vehicle fleets . Gesellschaft für Informatik eV, 2014, ISBN 978-3-88579-626-8 ( gi.de ).
- TCO in Gartner's IT Glossary