Often, when we think cost, we think price. But that’s only part of the story. Total cost of ownership (TCO) encompasses not just initial costs, but also the total costs associated with owning and supporting something over time. TCO is comprehensive, which makes it a far better indicator of total expenses than working with face-value prices alone.
And the benefits of calculating IT total cost of ownership extend far beyond cost accuracy. While financial calculations may not often fall under the scope of an IT professional’s job, calculating TCO can help IT professionals make better strategic decisions and find ways to do more with the IT they have. This blog explores the basics of TCO analysis, the efficiencies TCO can help power, and what to look for in your TCO calculations to identify opportunities for optimization.
Note: This blog assumes a basic understanding of how to calculate TCO — if you’re not sure how to calculate TCO, we recommend starting with the IT Professional’s Guide to Calculating TCO.
Types of TCO Calculations
First, it helps to understand what types of TCO calculations you can use as a basis for your analysis.
Past, Present, or Future?
TCO calculations typically include the past and current costs associated with an item or group of items; however, you can also project future TCO costs, and you can add them together for a projected lifetime cost.
- Past and current costs: How much has the tool or stack cost you so far?
- Future costs: How much can you expect to pay for this tool over a specified period of time?
- Past, present, and future: What is the lifetime value of a tool or stack over a defined time period?
Generally, past costs are easier to get precise than future costs. However, there are ways to calculate future costs that account for expected company growth, upgrades, end of life (EoL) costs, and even expected inflation. We’ve developed a calculator that has built-in formulas that account for these variables as well as many others — try it out to see how much your tools may cost you in the future.
TCO can be calculated for a single tool or for a set of tools.
- Single tool: You can calculate the TCO of one tool to reveal how much it has cost the organization to purchase, support, and maintain it, as well as how much it is projected to cost in the future.
Use case: You could calculate the TCO of your on-premises directory to see how much it has cost your company to support and maintain, and how much it can expect to spend on its continued support and maintenance over the next five years.
- Set of tools: Tools can be grouped together to calculate the cost of a solution or stack.
Use case: A company might want to know the total cost of owning and maintaining a security solution made up of several security tools. You can even use this method to calculate the cost of your entire infrastructure — this is a great exercise when deciding whether to migrate from legacy to the cloud.
What About Comparisons?
TCO can either act as a figure on its own or as a comparison tool.
- Standalone TCO: Standalone TCO gives you an idea of how much a tool or stack has cost you over time, and how much it is projected to cost in the future.
Use case: You might want to calculate the projected costs of maintaining a multi-factor authentication (MFA) tool for a growing team over the next five years to determine whether the costs will be viable.
- Comparison TCO: You can compare the TCOs of different tools or sets of tools. This is particularly helpful when deciding between solutions, or deciding whether to switch from an existing solution to a new proposed one.
Use case: If the projected costs of your MFA tool seem high, you could compare it to the projected costs of switching to an open directory that comes with MFA and several other tools, like mobile device management (MDM), patch management, and single sign-on (SSO). In this comparison, you would compare the projected cost of the proposed alternative directory over the next five years with the projected costs of your current directory, MFA, MDM, patch management, and SSO tools.
How to Analyze TCO Findings
Calculating IT TCO can help you make strategic decisions and improve your resource allocation. TCO-informed decisions can unlock:
- Immediate and long-term savings. Applying TCO figures to your existing tech reveals opportunities to cut, consolidate, and optimize.
- Clearer program planning. Understanding your IT TCO enables you to more accurately specify program milestones, KPIs, steps, and associated costs.
- Better company, IT department, and personal performance. Understanding IT TCO helps you improve your department’s resource allocation, streamline your infrastructure, and improve efficiency. Those wins are tangible proof points of your success in recommending and driving initiatives.
- Better employee experience and retention. Using TCO to optimize your IT environment helps maximize your teams’ potential rather than mire them in setup and maintenance efforts.
When looking at your company’s TCO, look for the following indicators of areas that could be optimized.
1. Look for Redundancy
Calculating the TCO of your IT infrastructure can help you identify opportunities to consolidate tools without losing needed functionality, ultimately lowering costs. To identify redundancies, try the following exercise:
- Itemize your software and tooling.
- List the features and capabilities of each.
- Calculate TCO, and project it out for 3-5 years (use this spreadsheet for automatic calculations).
- Highlight feature duplications or similarities.
- Highlight rarely used or unnecessary features.
- Determine whether you can consolidate duplicate features into a smaller stack or eliminate tools that provide little value.
- Calculate potential savings by adding up the projected TCO of the tools you could eliminate.
2. Look for High Costs
TCO calculations also allow you to examine your highest costs, which can sometimes be reduced. To find areas where you’re overpaying, try the following exercises:
- Look for the highest-cost items:
- List out the items in your infrastructure.
- Break them down by cost: note the number of licenses, amount of time spent on its support, subscription tier, and other relevant expenses.
- Calculate the TCO of each line item — past and current data could be sufficient, but including 3-5 years projections would help delineate future savings.
- Highlight the highest-cost items in your infrastructure.
- Look for ways to cancel, consolidate, or reduce spending on your most expensive items. For example, are you paying for unused licenses or premium features you don’t need? Are you paying for vendor support that your MSP or someone internal could handle?
- Quantify savings by adding up the projected TCO of any line items you can eliminate.
- Compare your highest-cost hardware to the TCO of a cloud alternative. Cloud-based infrastructure is almost always more cost-effective than legacy, as it eliminates recurring hosting, maintenance, and management costs for the equipment.
- List out the line items of your current infrastructure.
- Calculate the future TCO of each. Try projecting out at least 3-5 years to ensure you account for eventual equipment upgrades and maintenance your team will need to take on internally.
- Outline a cloud-based infrastructure alternative.
- Calculate the projected future TCO of the line items in your cloud-based alternative.
- Compare the projected TCO of the two options.
We conducted this exercise on a fictional company as an example — check it out in the TCO calculator. The Executive Dashboard – Projected TCO tab shows the projected savings the company would gain by switching to cloud-based infrastructure.
3. Accompany TCO with Risk Calculations
While TCO calculates the costs of what it takes to acquire and maintain solutions, it doesn’t account for the risks each solution poses. For an even fuller picture of your environment, consider including risk factors in your analysis — especially when comparing two solutions. Sometimes, a solution that reduces risk may be worth a higher cost.
For example, organizations that house their own legacy infrastructure typically provide their own physical security, which may not amount to much when accounting purely for TCO. However, the typical office’s on-prem security system can’t compare to the security global cloud providers have in place. In this case, the risk factor of in-house cameras and door alarms is significantly higher than that of a global data center monitored by security staff, protected with least-privilege physical access, and built to withstand everything from floods to seismic activity.
This difference in risk adds dimension to comparisons and proposals. Often, the risk factors of cloud solutions are notably lower than in-house risks, which can help build a case for moving to the cloud.
A Note on IT Consolidation
Tool sprawl is extremely common in organizations today — in fact, only 15% of SME employees need one or two accounts to do their jobs, while 43% need at least six. Sprawl is one of the biggest cost inefficiencies in many small and medium-sized organizations (SMEs), and IT consolidation is the best way to counteract it.
IT sprawl is largely caused by the reactionary process IT departments tend to take when it comes to tool acquisition: they need to work quickly, and needs are more easily filled with new tools than with extensive TCO analyses. Thus, IT teams fall into ad hoc purchasing patterns to meet the demands of their organization. Over time, this creates a tool-heavy environment crowded with many vendors, complex integrations, and roundabout processes.
Predictably, more vendors and tools lead to higher direct costs. For example, paying for an MFA tool, SSO tool, and directory platform separately would cost more than paying for one solution that offers all three. Consolidating tools, therefore, helps to lower costs by counteracting IT sprawl.
Meeting your needs with a few robust solutions is almost always more cost-efficient than doing so with many separate tools that each satisfy one or two criteria. Even when the robust tool is more expensive than a more limited counterpart, the benefits it provides, combined with the point solutions it allows you to eliminate, usually mean it will have a lower TCO in the long run.
In addition to these upfront savings, consolidation eliminates the indirect costs associated with sprawl. Aside from purchasing tools and licenses, tool sprawl also drives up indirect costs. For one, more tools means more time and effort demanded of you and your team. The complexity, unstable integrations, and convoluted processes that result from a cluttered tool environment decrease efficiency and obfuscate reporting. Tool consolidation removes the excess while optimizing existing architecture for better team efficiency, lower maintenance costs, and clearer data.
Calculate TCO Easily
We know that most IT professionals aren’t mathematicians, so we took the tedious part out of the TCO calculation process with a TCO calculator tool. It’s a free spreadsheet template that can calculate costs, project future costs that account for growth, inflation, and EoL costs, and compare solutions based on your input. It even generates screenshot-worthy graphs and visuals that will push your next proposal over the edge.