A Quick Guide to Calculating Total Cost of Ownership (TCO): Part 1, Hardware/ Software and Maintenance

May 14, 2020 by Brent Earls

Calculating Total Cost of Ownership (TCO) is a very important part of any manager’s job, whether it be of an employee, a factory machine, or IT equipment. Knowing your fully burdened costs of equipment is extremely useful for figuring out if it’s helping or hindering your business. For IT specifically, TCO has three main variables: hardware/software costs and maintenance/support, time, and environmental concerns. In part one of this series, we’ll break down the relationship of your hardware and/or software costs, the associated maintenance and your TCO calculations, and the caveats and pitfalls therein.

Factoring Hardware and Software Expenses into Calculating Total Cost of Ownership (TCO)

Hardware/software costs are one of the easiest things to figure out with TCO. Take the overall purchase cost of hardware (don’t forget shipping, tax, and other add-ons) and then add on the maintenance and support cost for the lifetime of the device.

Estimating ongoing maintenance/support is where the real fun begins because you must predict how long you keep the hardware/software and how much is it legitimately going to cost over time.

Navigating Estimating Maintenance/Support Costs

When you first go to buy something like hardware or software, the vendor will normally include some type of support for a given length of time. For some, it may only be for one year, and for others it may be three. DO NOT ASSUME THAT WILL BE THE YEARLY COST MOVING FORWARD.

A lot of vendors will heavily discount the year-one support price to make the cost of entry more palatable, but the cost goes up significantly – sometimes exponentially — in the following years. So if you’re thinking, “well I’ll just ask for the support pricing up front so I know ahead of time,” watch out. When asked for the cost of year 2/3/4/5 of support at the outset, vendors typically will give you the cost as an upfront purchase, which is discounted as part of the attempt to close the sale. That cost won’t break out the same as if you bought it yearly when the initial support runs out. Getting this cost from vendors ahead of time can be very tricky.

It’s also important to know that the longer you require support on something, the more expensive it gets. You may get used to a support cost for years two and three and assume it’s going to stay the same, but then when you get to five, the difference between year five and year six may be double or triple. There are some legitimate reasons for why vendors do this; the older the hardware, the more likely it is to fail and the more burdensome it is for the manufacturer to keep supporting it. However, some manufacturers increase those costs by a disagreeable amount as the device moves into its older years to incent you to replace it instead.

Trying to gather this information ahead of time is nearly impossible, as the vendor themselves often don’t know how much it will increase in the future. Our best advice is to make sure you plan for these costs to increase over time when calculating a TCO. If you know ahead of time you’ll DEFINITELY keep the product for five years, try and buy all the support upfront, because it will almost certainly be cheaper than buying it yearly.

Next we’ll dive into the time investment portion of your TCO calculations and how you are worth more than you might think.

If you have questions about how to better assess your current assets to help you make better technology decisions, we can help. Send us an email at info@mirazon.com or give us a call at 502-240-0404.

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