Apply Your Knowledge

Total cost of ownership (TCO) is a financial estimate designed to assess direct and indirect costs commonly related to software or hardware. TCO is a concept that is increasingly used by businesses around the world. The essence of the concept is that the full costs of a decision should be evaluated, rather than focusing on the initial purchase price (of hardware and software). For example, is the TCO of a new computer that cost $1,500 really $1,500? Or is the TCO the initial cost of $1,500 plus the cost to purchase updated software, additional RAM, flat-screen monitors, wireless mice, iPod accessories, etc?

A TCO assessment ideally offers a momentary value reflecting not only the cost of purchase, but also all aspects in the further use and maintenance of the equipment, device, or system considered. This includes the costs of training support personnel and the users of the system, costs associated with failure or outage (planned and unplanned), diminished performance incidents (i.e. if users are kept waiting), costs of security breaches (in loss of reputation and recovery costs), costs of disaster preparedness and recovery, floor space, electricity, development expenses, testing infrastructure and expenses, quality assurance, boot image control, marginal incremental growth, e-waste handling, and more.

Project Focus
When properly applied, TCO reflects the full opportunity cost of a decision. The cafe would like to purchase a computer system to host its applications including its web site, payroll system, scheduling system, e-mail, etc. You would like to apply a TCO analysis to help you make the purchasing decision and have downloaded a TCO template from Microsoft, AYK_EA.xls.

  • Review the template and create a document discussing the advantages and disadvantages of using TCO to make hardware and software purchasing decisions
  • How would you modify the template to meet your needs? What fields do you think need to be added? What fields do you think should be removed?
  • After analysis of the template, what fields are most valuable to your decision? What fields are least valuable to your decision?
  • If you are an advanced Excel user customize the template for a TCO for a complete system purchase for the cafe based on your analysis

File: EA_AYK.xls

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