Total Cost of Ownership (TCO)

ICT TCO Survey for Participants of an ICT Project

For participants of ICT projects of millions of Euro’s it is very useful to have a survey of total costs over a certain period of time: the Total Cost of Ownership, or TCO. ICT costs can either be investments (CAPital EXpenditure or CAPEX) or operational costs (OPerational EXpenditure or OPEX).

In the past also one time payments (One Time Charge or OTC) were applied in the survey of ICT costs. For practical reasons OTC will be considered nowadays as CAPEX for amounts above € 25,000, and as OPEX for amounts below € 25,000. This amount depends on the size of company.

In ICT TCO Surveys often a time frame of four years is taken. The reason for this is that most ICT systems are replaced after about four years, because it is then often cheaper to buy a new system than to extend the old system. Integrated application software on the other hand lasts for much longer than four years.

The preceding leads to following ICT TCO Survey, consisting of a mixture of CAPEX elements and OPEX elements, for a period of four years. TCO surveys are frequently made by Participants of an ICT project of millions of Euro’s with spreadsheets (eases calculations):

TCO_total = TCO₁ + TCO₂/(1+i) + TCO₃/(1+i)² + TCO₄/(1+i)³

In the ICT TCO Survey CAPEX₁₁ is the first investment in year1, CAPEX₂₂ is the second investment (extension) in year 2, CAPEX₃₃ is the third investment (extension) in year 3 and CAPEX₄₄ is the fourth investment (extension) in year 4.

In the ICT TCO Survey OPEX₁₁, OPEX₁₂, OPEX₁₃ and OPEX₁₄ are operational costs in year 1, 2, 3 and 4 due to the investment CAPEX₁₁ in the first year. In the same way OPEX₂₂, OPEX₂₃ and OPEX₂₄ are related to the investment CAPEX₂₂ in the second year, OPEX₃₃ and OPEX ₃₄ are related to the investment CAPEX₃₃ in the third year and OPEX₄₄ is related to the investment CAPEX ₄₄ in the fourth year.

Financial Experts use Present Value (PV) techniques to express the outcome of the ICT TCO Survey over four years in one figure TCO_total. TCO₂ for example in the second year corresponds to TCO₂/(1+i) in the first year. The Chief Financial Officer of an organization determines which yearly interest rate (i) is applied in these calculations.

ICT TCO elements

The most frequently used ICT CAPEX elements of an ICT TCO Survey are:

• Hardware
• License for Operating system software
• Installation
• License for Database software
• License for Application software
• First two phases of a Project (Intake, Definition)

The most frequently used ICT OPEX elements of an ICT TCO Survey are:

• Hardware maintenance
• System software support
• Database support
• Application support
• Facilities
• Electric consumption
• Technical operations
• Database operations
• Technical application operations
• Back-up & recovery
• Phases 3 - 7 of a Project (Design, Development, Testing, Implementation, Production)
• External personnel

It is advised to carefully consider each TCO element, if it is a CAPEX element or an OPEX element. Some software suppliers for instance supply software licenses that are paid at once (CAPEX), others supply software licenses that are paid monthly, quarterly or yearly (OPEX). A complete TCO checklist of CAPEX elements and OPEX elements is part of the course “Essential knowledge for Better ICT Decisions”.

ICT Budget Change for Financial Experts

The change in a budget, due to a new ICT Project of millions of Euro’s, can directly be derived from the ICT TCO Survey, by replacing CAPEX by depreciations of CAPEX over the years. This leads to following ICT Budget change, made by a Financial Expert (knows best depreciation policy) of an organization.

Conclusions

ICT TCO Surveys are useful for Participants of ICT Projects of millions of Euro’s, but are also useful for smaller ICT Projects. It has the advantage that no CAPEX elements and OPEX elements are forgotten in a Project, which is frequently the case.

In this paper TCO costs are for ease of use specified per year. Sometimes it is needed to specify forecasted costs of a Project per quarter or per month. This is the case when during a Project actual costs (registered per month) are continuously compared with forecasted costs.

The corresponding ICT Budget Change due to a new Project can easily be derived from ICT TCO Survey by Financial Experts of an organization.

Only in case of ICT Projects of tens of millions of Euro’s, the influence of tax is calculated from the ICT Budget by Tax Experts of an organization.