TCO refers to the deployment and operational cost of a system for a specified period of time, usually 3 years. The basic idea is to highlight one TCO as opposed to another, as compared to an ROI analysis which will weigh the costs and benefits of a particular project. A TCO inherently suggests that you’ve already decided to do a particular project; now the question is which is the lowest-cost solution.  At its simplest level of benefit, TCO helps companies quickly realize that the hardware and software acquisition costs for a new project rarely exceed 28% of the TCO over 3 years.  Immediately companies can see that the vendor which is the lowest cost provider of hardware and software -- in other words, the lowest acquisition costs -- is not necessarily the best solution over time.  An IBM mainframe is a classic example of this situation. The cost of an IBM mainframe, even when compared to a high-end UNIX alternative, routinely is more costly for applications such as ERP and CRM. However the IBM mainframe’s TCO very often is much more attractive, particularly when running the application on UNIX and the database on the mainframe.
The pluses of TCO include:

  • TCO is a great way to provide a side-by-side cost comparison to two different solutions
  • TCO underscores that the costs over time dwarf the acquisition costs for most IT projects
  • TCO highlights that determining the optimal server configuration is the keystone to TCO analysis because the vast majority of project costs are driven by the number and type of servers required
  • Unless a TCO tool has a configuration capability it is pretty useless
  • TCO is a wonderful way to highlight the economic benefits of partitioning, clustering, high availability architectures and Storage Area Networks (SANs)

The minuses of TCO include:

  • It exclusively focuses on costs and therefore a solution with a richer feature/function set will not get the attention it deserves
  • It does not take into account the time value of money
  • It requires a much better technical understanding of computing than most businesspeople have
  • It requires the vendors to divulge information they traditionally have considered