Total cost of ownership (TCO) analysis, or lifecycle analysis, is an often overlooked yet exceptionally beneficial activity that businesses should be conducting when they commence the equipment procurement process. Whether you need IT equipment, office fit-out, or highly specialised assets that are purpose built for your operation, TCO analysis can provide important information.
It’s often said that procurement costs generally only equate to 30% of the cost of an asset. It’s for this very reason that TCO analysis is important, and the concept is simple – look at the cost of running an asset over its life, don’t just consider the initial purchase price.
Some of the running costs will be obvious, others less so, but taking the time to consider this early in the procurement process means you can make an informed decision – it also means you can budget appropriately for the non-acquisition related costs.
So let’s consider some of the more obvious costs that should be incorporated into a TCO analysis:
- the price paid for the equipment
- the costs associated with acquisition
- the running costs, such as warranties, maintenance or service.
Perhaps more important, are the costs that are easy to overlook:
- set-up costs, which cover the incorporation of an asset into your existing operational practices
- operating costs, such as the power required to run the machine
- upgrade costs, which may be required to enhance or refurbish the asset during its life
- reconfiguration costs, in the event your business needs to utilise a tailored configuration
- change costs, if re-training of staff is required
- security costs, particularly if you are acquiring a new asset worth a substantial sum of money.
It’s unlikely that all of the factors listed above will be relevant to your business and you may even think of some costs that I haven’t listed.
If you are planning to finance the acquisition of equipment be sure to check with your finance provider what aspects they will and won’t include in your package. You can often incorporate some soft costs into a lease agreement but it is important to make sure you know what’s in and what’s out.
Once you’ve tallied up all of the relevant costs, you need to determine your approach to depreciation. Your options include depreciable life, service life and economic life. Alternatively, your business may choose to use a pre-determined period based on the type of equipment. For example, three years for a laptop.
Be warned…when you look at a piece of equipment in this way, you may be slightly shocked at the associated expense. Be sure to remember that a TCO analysis does not factor in the business benefits that flow from the equipment. The equipment you need may be revenue generating, it may improve productivity, it may reduce maintenance costs and time offline, or it may drastically improve the product you sell. So be sure to weigh these benefits against the cost.
TCO analysis isn’t intended to turn you off acquiring new equipment, it is intended to help you budget more effectively, ensure you are able to compare offerings and most importantly, make sure you are making decisions about critical assets with your eyes wide open.