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INTERVIEW QUESTION:

What is Total Cost of Ownership (TCO) and why is it important?

Posted by Chris Adams

Article Rating // 12243 Views // 2 Additional Answers & Comments

Categories: Business Analysis, General, Project Management

ANSWER

Total Cost of Ownership is an estimation of the cost of a new technology solution that considers the full cost of acquisition plus ongoing maintenance over a specific period of time, usually 5 to 10 years. Because the cheapest solution to acquire (whether purchase or custom-developed) is not always the cheapest solution to maintain over the long-term, TCO is a good way to compare alternative solutions from a financial standpoint and to ensure that the organization is prepared and able to cover the cost of a new solution over the long term.

Factors included in calculating TCO are the software solution costs (either purchase or development), hardware (purchase or lease, as well as ongoing maintenance), system tools and utilities, and personnel costs. Personnel costs include all personnel (business and technical) involved in acquisition, as well as estimated personnel to operate and maintain the system. If a new system will introduce new technologies, then the costs to train technical support staff (or to acquire new staff with that expertise) would be factored into Total Cost of Ownership. These maintenance costs are estimated over the designated lifetime period.

It may seem that all systems should require similar personnel effort to operate and maintain, but that is actually not the case. Systems differ in the amount of operating and maintenance tasks that are (or can be) automated, in the amount of operational support required (such as the amount of performance monitoring and fine-tuning that might be needed), and even in the amount of anticipated changes or enhancements anticipated over the next several years. Systems that offer greater capabilities for end-user configuration are often less costly to maintain, as this can reduce the need for continual minor code changes (with the associated costs to design, develop and test that can add up to significant amounts over time).

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Sandy Lambert
Business Architect
LinkedIn Profile

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ADDITIONAL ANSWERS / COMMENTS

hemal posted on Sunday, December 8, 2013 9:26 PM
A relatively unknown factor in the TCO is the cost of supporting various test environments for an application :
a. DEV - An environment for development team to make their changes and perform unit testing
b. SIT - An environment for functional testing to test the integrated piece.
c. UAT - An environment for users to get acclimatized to the new solution
d. PROD - Live version

If there exists a software that requires continual maintenance then the TCO for such an application would be relatively high because the of the cost of keeping each of the above 4 environments up and running.
Sandy posted on Tuesday, December 10, 2013 9:41 AM
Great point. If the software runs in a shared environment, then the total costs would be less - but it is still important to factor in. An interesting and sometimes overlooked contributor is the licensing model for commercial software. If the product carries a seat license, then there are additional licensing fees for every single environment where the software is installed.

Thanks for the feedback!
Sandy
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Do your homework prior to the business analysis interview!

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