Understanding Total Cost of Ownership

Embarking on swapping or adding technology platforms involves a mix of one-time and ongoing expenses, although organizations often are bound when their estimated costs are too low, thus running into budget constraints.

Before we dive into what costs to consider, let's clear up what total cost of ownership (TCO) means: it's a financial estimate that includes direct and indirect costs associated with the purchase, implementation, operation, and maintenance over time, which include both one-time and recurring costs.

Let's pull out the key parts of this definition...

• Direct and indirect costs

• Purchase

• Implementation

• Operation

• Maintenance

• One-time and recurring costs

...and work through each of these concepts to see how it applies to defining your estimated expenses.

Direct and indirect costs
The distinction between direct and indirect costs is academic, although you may encounter a pedantic person in finance or accounting:

• Direct costs are essential to operating a platform and always represent explicit costs (i.e. money out the door) to keep it functioning

• Indirect costs are supportive rather than essential to the operating a platform, and are either explicit costs (i.e. money out the door) or implicit costs (i.e. unrealized value associated with opportunity costs)

Purchase and implementation
These are associated with acquiring the platform and making it operational, and there can be subsequent implementation fees if you're using a phased approach to rollout the platform.

• Direct costs: core platform licensing, third party apps or services licensing, initial setup and implementation fees

• Indirect costs: time spent researching and evaluating platform options, training program fees, lost productivity for stakeholders involved in implementation

All of those are typically one-time costs, with the exception of licensing for the core platform and third party services, which are typically the start of ongoing costs. We'll see the ongoing portions appear as direct costs in the next section.

Operation and maintenance
These are associated with running the platform and keeping it operational.

• Direct costs: necessary support or maintenance fees, core platform licensing, third party apps and services licensing

• Indirect costs: unplanned support or maintenance fees, hiring new employees with expertise in the platform, opportunity cost to allocate employees to running the platform (e.g. monitoring, minor troubleshooting, supporting users)

Most organizations estimate only some of their costs, which leads to a lower estimated total cost of ownership than what is actually needed.

The result is an impact to usability, achievement of the outcomes for the initiative, and more money being spent to fill the gap.

To avoid this outcome, you can read how to more precisely estimate total cost of ownership, which is the natural progression from this newsletter.

TLDR: Estimating total cost of ownership requires considering all of the direct and indirect sources of cost, which are a mix of one-time and recurring.