Let’s not sugarcoat it – keeping up with technology is an expensive endeavor. But the actual price of technology (or rather, devices or services) goes far beyond the price tag initially attached to a piece of equipment. It lies in the total cost of ownership (TCO). But what is TCO, and why is it crucial for evaluating business tech investments? That’s what this article aims to explore. Let’s begin.
- What Is TCO
- Why Is TCO the Most Important Value When Looking for Business Tech?
- How to Calculate TCO
- Key Factors Impacting TCO
- How Can Businesses Navigate the Complexities of TCO Analysis Better
What Is TCO?
Total cost of ownership, or TCO for short, estimates the complete costs associated with owning, operating, and maintaining a specific piece of technology (or any other asset) throughout its lifetime. TCO is often referred to as the “actual” cost of ownership, as the initial purchase price accounts for only 10% to 20% of the total business expense.
However, you’ll also hear TCO referred to as the “hidden” cost of technology. Why is that?
Well, some business owners, especially less experienced ones, focus solely on the upfront cost of purchasing new tech. This leads them to believe that purchasing a less expensive device is a prudent financial decision.
But the truth is that the bulk of the expenses associated with technology ownership lies in the ongoing (and often overlooked) costs, which can significantly accumulate over time.
Since these business owners haven’t factored these costs into the initial budget, they might feel blindsighted when confronted with them. By that point, it’s too late to revise the budget or reconsider the investment strategy, and you’re stuck paying significantly more than you bargained for.
But why is this such a big deal?
Why Is TCO the Most Important Value When Looking for Business Tech?
For some businesses, budgeting for high-quality business tech, even based on the upfront cost alone, is no easy task. However, failing to account for TCO can only exacerbate the challenge. Here are some of the reasons meticulously scrutinizing the expected TCO before any major tech purchases (enterprise or consumer) should top your list of priorities.
Analyzing the Viability of Potential Business Purchases
Let’s be honest – anyone can calculate the total upfront cost of rugged tablets or mobile computers for their business. Just look up their price tags or inquire about bulk purchases from retailers like Energy Electronics, and that’s it. Multiply that price by the number of devices you need, and you get a straightforward figure.
Unfortunately, calculating TCO isn’t nearly as easy. But at the same time, TCO is the only factor that can help you determine whether the purchase is truly viable for your business. An in-depth TCO analysis will clearly show which solution will bring a return on investment (ROI) and business growth and which can do your business more harm than good in the long run.
Enhancing Budgetary Decision-Making
A well-executed TCO analysis allows you to direct your attention to types of devices that will be more beneficial for your business in the long run. For instance, this analysis is what brought about the boom in popularity of rugged mobile devices among large enterprises.
In 2020, International Data Corporation (IDC) analysts reported that as many as 41% of U.S. enterprises currently use rugged devices and plan to purchase more in the following years. But what does TCO have to do with this statistic?
After a detailed TCO analysis, it’s easy to see that rugged mobile solutions have lower maintenance costs, experience less downtime, and last significantly longer than “standard” devices. In other words, they’re significantly more cost-effective over the long term compared to consumer-grade mobile devices, which also means they have a lower TCO.
The IDC isn’t the only organization to make similar claims for rugged mobile devices. VDC Research, a leading advisory firm in the tech world, also shared similar findings in several studies. Luckily, it also found that TCO awareness is growing among business owners, and as many as 75% of people responsible for building (and managing) computing portfolios perform a TCO analysis before making technology-related decisions.
Mitigating Financial Risks
In an increasingly digital age, technology is integral to business operations. This just means that most businesses will need to purchase a substantial amount of tech equipment for everyday operations. Get a few key purchases wrong, and your business will likely face significant financial risks.
A TCO analysis will help you mitigate these risks.
By obtaining a more accurate financial projection of the tech investment over its entire lifecycle, you can avoid unexpected expenses, budget overruns, and financial trouble.
How to Calculate TCO
By now, one thing should be abundantly clear – no business technology should be purchased without a TCO analysis. But unfortunately, the analysis in question isn’t as simple as stating this fact.
Sure, it might seem simple, as TCO is essentially the sum of the initial purchase price and operation costs across the asset’s lifespan. But the operating costs aren’t as easy to identify and often extend beyond the “obvious.”
However, identifying all these cost elements (and including them in the analysis) is the only way to get a realistic and actionable TCO. But even that isn’t enough for an in-depth TCO analysis. So, let’s see how you can approach this analysis properly, step by step.
Step 1 – Identifying the Goal of the Analysis
Before diving into the numbers, you must determine what exactly you’re looking for. Why? Well, the goal of the analysis will also dictate its format. For instance, calculating the lifetime TCO of a device only calls for a simple figure. But looking for an alternative (and cheaper) tool will require additional figures, as well as comparison charts and future projections.
To help understand the TCO calculation better, let’s say your goal is to determine whether your business will save money by switching from consumer to enterprise-grade electronics.
Step 2 – Define the Key Parameters of the Analysis
When performing a detailed TCO analysis, you must define three parameters – time, growth, and inflation.
In terms of time, your analysis will need a defined period. Most define this period as a “lifetime,” but some will also deal solely with the future or do a present-to-past calculation.
For instance, in our example, you can only calculate future TRO, as enterprise-level devices are new to your business. As for the precise period, five years is an average.
When it comes to growth, you must ask a single question – does your company plan to grow soon or quickly? If so, you must account for this growth in your analysis. Why? Well, let’s say your company is likely to double over the next few years based on current projections. This means your technology needs will also likely double, and not accounting for them means potentially hindering the scalability of your technology infrastructure.
A handy formula you can use to account for growth is as follows:
(Future value) = (Present value)*((1+(Growth_rate)*(Years))
By using this formula and a 5% growth rate (factored into the formula as a decimal: 0.05), you can determine that the future value of a $1,000 device in five years is $1,250.
If you want to get more detailed with year-over-year growth, the formula becomes:
(Future value) = (Present value)*((1+Growth_rate)^(Years)
With that formula, something that costs your company $1,000 and needs to grow by 5% each over five years will cost about $1,287.
And last, but as anyone who has had to deal with it will know, certainly not least, there’s inflation. Sure, this factor might be too challenging to predict, but its impact on TCO is undeniable. Even with an (informed) inflation estimate, you’re more likely to understand the real future TCO, so ignoring this factor should never be an option.
To factor in inflation, use the following formula:
(Future value) = (Present value)*(1+(Inflation rate))^(Years+Growth_rate)
For reference, the national average for inflation was roughly 2.1% over the last 10 years.
Step 3 – Factor in the Additional Costs
This is the part where the TCO analysis gets a bit tricky. There’s no one-size-fits-all approach, as every business has unique considerations in the tech department. Some might be simple to track, such as a monthly service fee. Others, however, can be harder to identify, monitor, and calculate, such as the costs associated with device downtime.
Still, getting as close to the entire scope of operating costs for a piece of technology should be your primary goal during a TCO analysis. Some governmental agencies and electronics manufacturers even offer calculator tools to help you navigate these complexities. Take this handy tool from the U.S. Environmental Protection Agency as an example.
But if you want to learn which costs you can expect in your TCO analysis, the next section is for you.
Key Factors Impacting TCO
A comprehensive TCO analysis should include all direct and indirect costs accumulated by a piece of technology from its purchase to its decommissioning. This article will explore some of the most common factors impacting TCO (beyond the acquisition cost) when buying devices like rugged tablets and handheld mobile computers.
IT overheads refer to the ongoing operational and support costs associated with managing information technology (IT) infrastructures and systems within an organization. These might include the following costs:
- Monitoring and support
- Professional services
Most of these costs will depend on the so-called “IT Ratio,” which is the number of devices an IT technician should manage. According to the 2023 report by VDC Research, enterprises have an average 70:1 IT Ratio, meaning one IT technician is responsible for 70 devices. According to the same study, the average IT administrative cost is $680 per device per year.
Lost Worker Productivity
Another leading driver of TCO is lost worker productivity, which refers to the impact on a business’s efficiency and output when employees are unable to perform their tasks. This inability typically results from an IT incident, which, on average, lasts 74 minutes. That’s 74 minutes during which no one can use the problematic device, leading to a direct loss in productivity and costing you around $43.
Other factors that can contribute to a loss of productivity include device user-friendliness. Poorly designed devices can be challenging to navigate, lowering the productivity of the employees using them.
Of course, business owners can reduce this loss by owning spare devices, but this move also incurs additional expenses.
Though downtime is closely connected with lost worker productivity, this factor can cost businesses so much money in the long run that it deserves its distinct consideration.
Downtime refers to the period during which IT devices are unavailable or not operating at their full capacity. Besides the already covered reasons, this can happen in the following scenarios:
- The device’s system needs to go down to facilitate maintenance activities, updates, or patches.
- A dead battery causes a temporary disruption in work.
- A device breaks down.
As far as the battery goes, enterprise-style devices are less likely to cause disruptions, as their batteries last longer and usually can be hot-swapped. The same goes for device failure.
Enterprise-style devices are significantly more durable and rugged than consumer electronics, allowing them to experience fewer failures. To put things into perspective, 78% of rugged devices survive four years of use, compared to only 47% of their consumer counterparts.
Lost or Stolen Devices
A device doesn’t have to encounter a problem to be put out of commission. It can also get lost or stolen. Though many TCO analyses overlook this factor, referred to as “attrition,” it’s a critical consideration given the surprisingly high annual percentage of devices that go lost or get stolen. Unsurprisingly, this percentage is much higher for consumer devices, presumably because they can be easily resold. Plus, the manufacturers of enterprise-grade devices often offer sophisticated tools for closely tracking and monitoring their equipment.
For TCO calculating purposes, you can estimate a 2.5% to 3.5% loss per year.
Level of Vendor Support
It’s not uncommon for electronics vendors to slash the prices of their devices to entice new customers. However, this typically comes at the cost of long-term vendor support and add-on offerings.
Without quality support, your IT overheads will likely increase as you grapple with technical issues, updates, and system integration on your own. As for add-ons, getting a basic device stripped of any advanced features only means you’ll have to spend more money down the line to meet your evolving business needs.
And what do both of these scenarios lead to? That’s right, a higher TCO!
How Can Businesses Navigate the Complexities of TCO Analysis Better
There’s no doubt about it – if an enterprise-level organization wants to succeed, it must heavily invest in technology. For those technology investments to be prudent and successful in the long run, the organization in question must power through the complexities of the TCO analysis.
Though there’s no way around it, there’s a way to make this analysis go much smoother – by purchasing devices from reliable vendors.
One look at the key factors impacting TCO reveals that many depend on the quality of the device or its vendor. By choosing a reliable vendor that only offers high-quality enterprise-level devices, you can mitigate the potential issues that can lead to a higher TCO. Plus, these devices have a high TBO (total benefit of ownership), which can also have a far-reaching impact on the overall success of your business.
Reach out to experts at Energy Electronics to equip your business with technology solutions that not only meet its immediate needs but also contribute to its long-term success.