What Is Total Cost of Ownership for IT?

(and Why Does It Matter?)

Written by Ashley Gwilliam on May 22, 2023

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Cybercrime has come a long way since 1995.

That’s when Angelina Jolie and Johny Lee Miller starred in the movie Hackers

Hardly anyone alive possessed the skills demonstrated for hacking into the Gibson, a mighty “supercomputer.” Fun fact: the duo got married shortly after filming. 

Unfortunately, hacking is no longer just an obscure movie plot. Last year, the FBI reported more than 847,000 cyber breach complaints — that’s a 7% increase from 2020. 

With the click of a mouse, criminals access sensitive information, commit fraud, and launch attacks that shut down entire networks.

Total Cost of Ownership (TCO): More Important Than Ever

The good news? Organizational leaders are increasingly heightening security expectations to protect their businesses from online threats, seeing them as a priority on par with IT operations. 

The not-so-good news? The same executives often fail to consider exactly how much time, finances, and expertise these new security implementations will take. Alternatively, they may feel it’s too expensive to support both cybersecurity and operational initiatives and opt for those that “move the business forward”. 

As mentioned in Gartner’s 2022 Report for IT Leaders, maintaining acceptable levels of security requires a sustained, predictable, and consistent level of annual spending. The question then lingers: What is the total cost of ownership for cybersecurity initiatives?

This post will answer that question in detail. We’ll also highlight some typical costs IT admins may incur when implementing software solutions.

What Is Total Cost of Ownership (TCO)? 

Total cost of ownership (TCO) is a measure of a “thing’s” complete cost; that thing could be a single tool, complete product solution, professional services, or even whole parts of an IT infrastructure. In other words, it involves adding up all expenses associated with acquisition over time. 

TCO includes an item’s initial purchase price, ongoing licensing fees, maintenance/repairs, and indirect costs such as implementation, training, and support. 

Together, these expenses can add up to a significant amount over the lifetime of a product or system. Second fun fact: the Gartner Group popularized the concept of TCO in the computer and software industries in 1987 before other industries began to follow suit.

Below is the basic formula for calculating total cost of ownership:

TCO = Purchase Price + (Costs of Operations x Time)

While the formula is simple in principle, application becomes exceedingly complex the more factors are involved. Common variables that increase complexity when determining TCO are period growth, inflation, and end-of-lifecycle costs. 

Let’s walk through a quick example to demonstrate TCO’s relevance.

General Example of TCO

Say you’re in the market for a new car, and you’re deciding between a conventional gas-based vehicle or an electric vehicle (EV). In most instances, the purchase price of an EV would cost more than the gas-powered option. But is that all there is to it? 

As a buyer, you must weigh the cost of powering each car over time. Not to mention the cost of maintenance, repair, insurance, and other associated costs of each vehicle.

Adding up these factors provides a much clearer picture of how much each car truly costs. Hence, the term “total cost of ownership.” Obviously, purchasing an automobile is a major personal investment for most folks. But TCO analysis is also a powerful tool for making corporate procurement and operational decisions. 

Benefits of Calculating TCO

Any IT manager who’s ever had to justify an IT project knows numbers matter. But not just any numbers — the correct numbers. 

A well-detailed TCO gives executives a more accurate picture of the actual cost of a project, and managers who can provide concrete TCO numbers are more likely to gain organizational support for their proposals.

For IT admins, calculating TCO helps identify opportunities for boosting existing processes. For example, you may find you’re spending too much on support costs or that you could save money by switching from legacy infrastructure to a vendor-managed solution.

Improve TCO with JumpCloud

With JumpCloud, you can expect benefits like:

  • Tool consolidation: This means getting rid of the extra tools you don’t need and streamlining your infrastructure. Could there be anything better than managing all your security solutions from a single intuitive dashboard? Other than sliced bread, of course.
  • Enhanced performance: The flexibility and scalability offered by vendor-managed solutions makes it easier to perform better in the face of ever-changing needs.
  • Accurate planning/forecasting: Being aware of required costs, allows for more accurate long-term budgeting. This is a positive compared to the uncertainty that comes with running legacy infrastructure, where unexpected maintenance expenses often arise.
  • Cloud migration perks: Transitioning from on-prem reliance to cloud-based services provides easy integration, increased agility, simplified maintenance, and more accessible support. 
  • Greater efficiency: Not to mention you can put the human resource of the IT department to better use than having them mired in setting up and maintaining legacy systems that are not providing optimum value anyway.

Now, let’s take a closer look at some common elements vying for budgetary allocation in the typical IT department.

Types of IT Expenses

Money doesn’t grow on trees; the best IT managers are always looking for ways to get the most bang for their buck. As a reminder, TCO considers all costs associated with deploying a product over its life cycle, including software and hardware, training, and support. When purchasing new IT products, expect to ramp up costs in the following three areas:

1. Acquisition Costs

The cost of the software or application plus the incurred expenses of getting it up and running are known as acquisition costs. Expenses such as the purchase price of the software licenses or subscription and the cost of on-site hardware installation and employee training also belong to this category.

Additional acquisition costs:

  • Migration
  • Research
  • Legal services
  • Testing
  • Installation

Upon acquisition, other expenses are required to keep your software running and functional. That’s what makes the next two categories just as important.

2. Operating Costs

Operating costs represent the totality of the recurring costs expended by the organization to maintain the operation and existence of the software throughout its lifespan.

Operating costs include:

  • Maintenance
  • Support service
  • Software updates
  • Security
  • Backup
  • Troubleshooting
  • Renewal of licenses and subscription 

Other than these, there is another category which, surprisingly, most people tend to overlook: human resource costs.

3. Human Resource Costs

In addition to purchasing and operating the software, you also need to factor in the human resource costs associated with running it.

To get the most out of your investment, you need knowledgeable personnel or professionals to manage the software on an ongoing basis. This translates into additional costs in training or hiring in-house technicians or third-party consultants.

HR costs include:

  • Training costs
  • Onboarding costs
  • Remuneration costs

Once you understand all three categories of cost — acquisition, operating, and human resources — you can assess which software solutions are affordable long term.

Calculating TCO

Once again, the formula for calculating total cost of ownership is:

TCO calculation

Unfortunately, determining every operating cost factor is sometimes like finding every needle in a haystack. The ease of calculating TCO of different software or services varies from project to project. 

For instance, it would be more challenging to estimate the HR cost of software that requires personnel working in other roles than it would be to calculate the HR cost of software with a dedicated personnel.

If that wasn’t enough, business conditions like growth, inflation, or economic recession also impact TCO calculations. Given the complexity of TCO, we recommend enlisting the help of your organization’s finance department when in doubt. 

Doing so will ensure the organization takes all relevant costs into account without any oversights. Furthermore, because operating costs can vary over time, partnering with finance will help ensure your TCO calculation is updated regularly.

Need Step-by-Step Guidance on TCO?

TCO is a metric that provides a comprehensive view of all the costs associated with a project over its lifespan. This includes everything from hardware and software costs to support and training expenses. 

Want to learn more about how to make better technology infrastructure investments with TCO? Download our IT Tool Centralization Calculator. 

This interactive calculator allows you to determine exactly how much you could save by exchanging your personal stack of point solutions for the JumpCloud Directory Platform.

Significantly reduce your costs by combining SSO, MDM, MFA, PAM, IGA, and more behind a single pane of glass.

Ashley Gwilliam

Ashley Gwilliam is a Content Writer for JumpCloud. After graduating with a degree in print-journalism, Ashley’s storytelling skills took her from on-camera acting to interviewing NBA basketball players to ghostwriting for CEOs. Today she writes about tech, startups, and remote work. In her analog life, she is on a quest to find the world's best tacos.

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