What is TCO and how to calculate it for software acquisition?

What is TCO and how to calculate it for software acquisition?

Por: Pedro César Tebaldi Gomes em 02.12.2016

TCO – Total Cost of Ownership

TCO – Total Cost of Ownership is the valuation method of direct and indirect costs of a product to quantify its real value, such as software and hardware, and everything that is required to keep them working.

It is extremely important for IT governance and return on investment (ROI) in IT projects.

 

TCO - Custo Total de Propriedade

 
A good example is the acquisition of a car. In addition to the cost for the ownership, the costs with documentation, gasoline and labor must be taken into consideration. This concept was adopted in 1987 by Gartner Group and was adopted by IT companies aiming at performing a valuation of the investments around the industry. Keep reading and find out how to calculate TCO for the acquisition of software!

 

TCO in IT

Many things must be taken into consideration at the moment of acquiring a software such as, for example, the nature of the software (proprietary or open code), the environment where it will operate (machines in general, such as servers and all the hardware involved), whether the acquisition is through licensing or purchasing and so on.

It is very common the association of IT with high costs, either related to equipment or to labor. The function of the TCO is providing an estimate of the entire investment, therefore preventing the perception of investments in IT from being based solely on superficial analysis. After all, one of the objectives of IT is ensuring greater efficiency in processes that are supported by technology.

 

How to calculate the Total Cost of Ownership

In order to calculate TCO, many factors must be considered, such as the costs of acquisition, implementation and maintenance and support costs. Each item is important when it comes to making the calculation:

 

Acquisition

There may be considered items as purchase of hardware and software, time spent in the implementation (opportunity cost to perform other activities), machine depreciation, technological obsolescence and purchase of equipment.

 

Implementation costs

The costs of installation, configuration and customization must be considered at the moment of contracting an IT solution. These costs include the values per se, as well as the installation time, the internal workers involved, hours spent with training and the learning curve until the team is familiar with the solution.

 

Support costs

They consider the items to keep the system working. Support hours to carry out the activities, migration of infrastructure, and construction of customized agents and plugins for a certain company may be counted.

 

Proprietary software vs free software

The easiest way to conceptualize the difference between proprietary software and free software is by saying that the proprietary was developed for a company that holds the rights of the software and the use is subject to the acquisition of a license. Free software is a system developed by several developer communities that intend to provide the required maintenance, as well as the updates to keep the system working.

The difference between these modalities impacts totally the TCO, as often these companies work with annual license renewal, while in the case of free software there must be a concern with skilled workforce to make the customization required for your company, in addition to often need an internal expert worker.

In addition to free software, other technology solutions have changed a lot the scenario of the last TCO analysis. We can mention cloud computing and SaaS (Software as a Service) as having major influence on these changes, especially for changing the way investments are made.

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