What is total cost of ownership (TCO)?

TCO: definition and importance

Total cost of ownership looks at all costs of an acquisition over its entire lifetime. The principle is familiar from the company car: what matters is not the list price but the sum of purchase price, maintenance, fuel and loss of value. The same applies to software and IT systems, only the follow-up costs are less visible.

Especially with software decisions, looking at the entry price is misleading. A cheap subscription can become more expensive over five years than a one-time development, and a seemingly free open-source solution causes effort for operation and maintenance. TCO makes such differences comparable.

Which cost types belong in it

A distinction is made between one-time costs such as procurement, development, setup, data migration, interfaces and training, and ongoing costs such as licenses or subscriptions, hosting, maintenance, updates, support and internal working time. Hard-to-spot costs come on top: downtime, extra effort from unsuitable functions and later exit or migration costs.

The calculation covers a fixed period, say three to five years, and should use realistic assumptions: how many users will be added? How often do requirements change? What price increases are to be expected? The more components are captured, the more reliable the result, and the better quotes can be compared.

• Purchase, development and setup
• Data migration, interfaces and training
• Licenses, subscriptions, hosting and operation
• Maintenance, updates, support and internal working time
• Downtime risks as well as migration and exit costs

Real-world example: subscription or custom solution?

A service provider with 25 employees compares standard software on subscription with a custom solution. In this example calculation, the subscription costs €40 per user per month, which is €12,000 a year and €60,000 over five years, plus setup and possible add-on modules. Price increases and new users are not yet included, and internal working time for maintenance and onboarding is still missing from this simple calculation.

For the custom solution, one-time development costs are set against ongoing costs for hosting and maintenance. Which option is cheaper is decided by the overall calculation including customization needs, dependence on the vendor and the effort for workarounds. The numbers are assumed and only show one way of calculating, not a price statement. Only with your own values does the calculation become reliable.

Common mistakes and imple­menta­tion

Common mistakes are leaving out internal staff costs, too short time horizons, missing risk buffers and ignoring exit costs. For cloud services, also check price adjustment clauses and whether you can export your data completely. Always prepare the TCO for all alternatives using the same scheme, and update it when the number of users or requirements change significantly.

Nano Concepts supports software and provider selection with a transparent total-cost view, so that you know costs and follow-up costs before deciding. This applies to custom development as well as to the use of standard software or open-source solutions. We document the calculation so that you can justify it internally or to financiers.