Understanding Total Cost of Ownership (TCO)

July 2, 2020
By: David Godibadze
Understanding Total Cost of Ownership (TCO)

Nearly two-thirds of small businesses and organizations are expected to purchase new IT assets this year. On average, one in four office computers will need to be replaced. Old and outdated network and server equipment will need to be refreshed. Staffing needs will change. When analyzing your TCO, you are likely to experience a bit of sticker shock.

Tight budgets and limited expertise often keeps small to medium-sized businesses from making effective IT decisions. However, understanding hidden technology costs can actually help you reduce unnecessary expenditures and reallocate resources to more important business functions. IT Solutions Network has outlined current industry standards for determining TCO below - before you invest in new IT assets this year, we encourage you to take this information back to the C-Suite to analyze your spending history and implement best practices that will improve your bottom line.

Why is TCO so important?

Gartner, Inc. defines TCO as “the total cost of using and maintaining an IT investment over time.” TCO calculations include a combination of direct costs (hardware, software, operations and administration) as well as indirect costs (end-user operations and downtime). TCO is often overlooked and unbudgeted, presenting an inaccurate IT spending analysis and poor IT decisions.
Most organizations believe their direct costs end at the point of purchase. However, research shows that a computer’s base price typically represents less than 20% of its TCO, with technical support, maintenance, and labor costs accounting for the remaining 80%. These aftermarket expenses represent the greatest piece of the TCO pie and should, therefore, warrant the highest levels of scrutiny.

Computers require constant configuring and maintenance. Ongoing costs related to security measures, software updates, computer repair and general support are unavoidable. However, simplifying your IT infrastructure and management processes will increase efficiency, expand productivity, and significantly reduce your TCO.

IT Spending Benchmarks
  • The average small business spends 6.4% of its annual revenue on IT expenses. (AMR Research)
  • 80% of total IT costs occur after the initial purchase. (Gartner, Inc.)
  • An unmanaged PC costs $5,000 per year. (Gartner, Inc.)
  • On average, firms spend $700 per user per month when all IT expenses are factored.(Gartner, Inc.)
  • Employees spend 30 minutes per week trying to fix PC problems or helping a co-worker.(Compass America)
  • The average trade association spends $74,000 on hardware and software every year.(American Society of Association Executives)
How much do you spend on Technology?

Probably much more than you think.

Take a look at the pie chart below—an unmanaged or poorly managed desktop PC costs more than $5,000 per year. When factoring in associated network costs, such as firewalls, storage, servers, routers, printers, and internet connectivity, estimates exceed $8,500 per PC annually.

Remember that the initial purchase is just a fraction of the total cost of ownership, which means a $1,000 PC could actually cost more than $15,000 over its three-year lifespan. If a 10-person organization upgrades its PCs every three years, it likely spends a minimum of $120,000 managing those computers AFTER the purchase. The same logic applies to buying servers and related network hardware – the real investment begins once that equipment arrives at your door.

Even though more than 50% of TCO comes from indirect expenditures, many organizations focus solely on curbing direct costs. Since tight budgets have already reduced IT spending to a minimum, taking measures to improve end-user operations and decrease downtime can generate significant cost savings in the long run. In fact, Gartner recently found that a well-managed computer is 37% less expensive than the example above, often saving several thousand dollars per PC, per year.

Tips for Reducing TCO

IT spending is really a balancing act between hardware, software and services. According to Gartner, strong PC management is the key to overall cost reduction. The more money allocated for direct IT expenditures, such as operations and administration, the less money will be wasted on lost productivity and downtime.

Unfortunately, the reverse is also true. Because of declining IT budgets over the last few years, organizations have been forced to hold back on new purchases and temporarily Band-Aid ailing IT systems.

However, pinching pennies on proper infrastructure and management procedures will cost you dearly in the long run. Here are several important ways you can reduce TCO and increase efficiency:

  1. Measure your current IT spending so you can effectively manage and control your costs.
  2. Build and maintain an accurate inventory of hardware, software and appropriate licenses.
  3. Reduce complexity by standardizing equipment, software platforms and configurations.
  4. Streamline processes for operating system patches, security updates, data back-up and maintenance.
  5. Protect against viruses, spyware, hackers and physical threats.
  6. Control user access to applications, settings, network resources, databases, and other IT assets.
  7. Outsource key IT functions, such as technical support, data storage and back-up, to trusted, experienced vendors.
  8. Provide regular training for both employees and internal IT staff.
  9. Consider implementing a “thin client” or “utility computing” model to more effectively manage and protect PCs.
Category Expense Definition How to Calculate
Hardware & Software Direct Includes initial hardware and software purchases or lease costs, along with software licensing, subscriptions, maintenance contracts, extended warranties, set-up fees, supplies, materials and spare parts. Pull invoices, purchase orders and records related to hardware and software expenses over a three-year period. Divide total costs by three to get an accurate annual TCO picture. Depreciation costs should also be included.
Operations Direct Includes all labor costs for IT operations, such as tech support, administration, helpdesk, etc.

Includes staff salaries (wages and benefits), as well as any outside service providers. Also includes facilities costs used by IT staff (office space, furniture, utilities), along with network costs and internet connectivity.
Many small organizations do not have dedicated IT staff. In that case, responsibilities typically fall to the office manager or person who knows the most about computers. Estimate the # of hours that person (s) spends directly managing IT and multiply by their hourly wages. If you work with an IT service provider, add up all those payments, including hourly fees. If you are locked into a monthly retainer or long-term IT service contract, make sure you factor in those fees as well.
Administration Direct Includes finance, HR, administration and procurement costs spent managing internal IT staff or outsourced providers. Also includes training for staff members. Whether you have an internal IT staff or work with outside service providers, someone still spends time hiring, procuring and managing those relationships. Estimate the # of hours spent on IT oversight and multiply by the appropriate hourly wage. Any employee training expenses should also be calculated.
End-user
operations
Indirect Includes productivity lost to end-user frustration, troubleshooting, “futzing” and providing informal IT assistance to co-workers. This category is the most difficult to measure, yet represents the highest percentage of TCO. Many employees try to fix problems themselves, rather than pay expensive hourly rates for outside service providers. Estimate the # of hours employees lose dealing with computer issues, along with the # of hours they spend self-training or helping others, and multiply by the average hourly wage.
Downtime Indirect Productivity and revenue lost to inoperable or inaccessible computers, servers, software, internet connectivity, etc. Estimate the # of hours computers are down due to viruses, hardware failure and planned maintenance and multiply by the average hourly wage.
What does IT Solutions Network recommend to help control IT costs?

As you can see from the above information, a majority of the expense comes from unmanaged or poorly managed IT systems. IT Solutions Network recommends considering the following:

  1. Hire a CIO-as-a-service company: most small businesses cannot afford a full-time CIO. Hiring a CIO-as-a-service company can save you hundreds of thousands in wages, benefits, and more. IT Solutions Network offers the vCIO service as a part of the Managed IT Services.
  2. Explore your options for Managed Services: many companies can actively monitor your network and server infrastructure, and proactively manage issues before they impact your company and its bottom line. IT Solutions Network offers a free evaluation and quote on managed services that can save you thousands of dollars per year per user.
  3. Consider a managed HelpDesk service: cut down on your labor costs and hire a managed/outsourced helpdesk service. These services typically come at a low cost-per-month- per-user basis and can be viewed as an insurance policy against most computer issues. This will make your costs predictable and affordable.

Sources: Gartner, Inc., Compass America, AMR Research, allieditpartners, American Society of Association Executives, Salesforce

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