Total cost of ownership

When looking at a product, it is not just a question of how much it can be produced and ultimately sold for, but rather a holistic view of the entire product life cycle. Total cost of ownership, also known as TCO, is a method for analyzing products and services in precisely this way. Not only acquisition costs, but also direct and indirect costs are always taken into account, creating a basis for making a decision for or against an investment.

An overview of the key features of total cost of ownership:

• TCO is a cost analysis method or an accounting method that takes into account all costs of an investment (direct and indirect).
• Bill Kirwin, who in 1987 developed a method for calculating the total cost of IT investments, is a key figure in the current importance of the “total cost of ownership” approach. The special feature here is that acquisition costs for hardware and software, for example, only account for a negligible proportion of the total costs, plus costs for operation and use.
• With the help of various TCO pricing models, some of which can be customized, companies can make targeted decisions regarding investments, profitability calculations or the selection of suppliers.
• The core element of TCO is that a distinction is made between direct and indirect costs and individual TCO models generally represent best practice models – depending on the industry and area of application, more specific, ideal-typical processes are then assumed.
• Classic questions in the course of TCO are, for example, those where a distinction must be made between purchase, rental or leasing models or those that influence rationalization within the company.