Total Cost of Ownership
by
Patricia Hendricks
Educators agree that technology is necessary to manage and teach K–12 students. However, administrators are pressured with tight budgets. Therefore, technology coordinators are looking for solid numbers for making technology purchasing and budget decisions. Total Cost of Ownership (TCO) is a model for predicting and analyzing complete technology costs—capital costs, technical support costs, administration costs, and end-user operations/downtime. Ghazizadeh (2003) of the Intel Corporation suggests, “The cost of support and maintenance of a given platform typically represents a cradle-to-grave expense that can exceed the cost of the hardware by several times” (p. 1).
TCO was developed in 1987 by Bill Kirwin of the Gartner Group Inc. He first applied this model to desktop systems. Since 1987, businesses have used TCO analysis as an annual part of their budgeting experience. The benefits of conducting a TCO analysis include 1) developing a framework for good financial analysis of information technology (IT) investments, 2) providing a baseline for IT costs, 3) generating a widespread understanding that purchase cost is not total cost, and 4) managing IT assets effectively.
Framework for Financial Analysis
TCO provides a framework for good financial analysis of IT investments. TCO displays total costs in implementing a technology system and includes both direct and indirect costs. Direct costs are capital expenditures such as purchase price. Indirect costs are hidden costs that include labor costs (e.g., the time it takes a teacher to help colleagues find their files on the network server).
Examples of direct costs are
- hardware and software purchases,
- maintenance and service contracts,
- network infrastructure costs,
- fixed operating costs,
- deployment costs (including database conversions and application migration), and
- integration expenses to existing systems.
Indirect costs include
- conversion costs,
- end user operations (including peer support and file/data management), and
- downtime.
An example that applied TCO to a technology implementation is the Lotus Domino TCO analysis of various servers for Lotus Domino implementations. In 1998 IDC surveyed enterprise Domino sites (over 5,000 people) that migrated from PC LANs to AS/400 servers. Christiansen and Cosgrove (1998) found that while hardware and software costs for PC LANS were lower, AS/400 cost $105/year/user and PC LAN $139/year/user over a 5-year implementation. In other words AS/400 Domino sites’ 5-year TCOs were 32% lower than those of PC LANs. This is a significant savings. In conclusion, they found that the differences in operations staffing overshadowed hardware and software costs.
Establishing a Baseline
TCO provides a baseline for IT costs. TCO analysis is time consuming at first. It requires technology leaders to gather specific data on diverse systems spread across the entire district or school. For instance technology leaders must catalog all devices and supplies. It requires input across the educational system from teachers, office support staff, administrators, and technology leaders. The Consortium for School Networking and North Central Regional Education Lab admonish that data collection becomes easier over time, and data become more accurate. Gartner (2003) states, “The best value can be obtained by performing these studies over time. In this way, the effects of actions taken from a perspective of technology, organization and process can be shown” (p. 3).
Additionally, what-if questions can be generated and answered with a TCO analysis. After entering true data about technology devices and school populations, technology leaders can enter projected data to create scenarios or conduct subsequent analyses. They may investigate questions like the following: What costs savings will we realize if we migrate to a single platform (Mac or Windows)? What if we establish a thin-client operation in the high school? What if we install a mobile computing lab in the middle school? These what-if scenarios can inform future technology decisions.
Generating Understanding
TCO analysis helps generate a widespread understanding that purchase cost is not total cost. Since many people must provide input into a TCO analysis, this experience is a teaching opportunity. Ghazizaeh (2003) states “[T]he cost of hardware represents about 15% of the total cost of IT assets, while support costs are typically as high as 70% to 85% of the total cost” (p. 4). Bailey and Heidt (2003) explain that a $200 printer can easily have an annual cost of over $1000 when all the supplies and maintenance costs are included. Presenting the efforts of the TCO helps the entire education community understand the costs of technology.
Effective Management
TCO allows for effective management of IT assets. Educators often make technology purchases from different operating budgets. For instance special education may purchase adaptive devices for individual students from a separate operating budget than the technology division. Emigh (1999) illustrates, “In not-for-profit settings like universities, researchers often obtain computer equipment through grants. IT staffers are sometimes unwilling to count this equipment as assets if the non-IT department isn’t managing it” (p. 1). An accurate TCO would help each school and district successfully catalog and manage all technology assets.
TCO Tools Built for Educators
There are two TCO tools that have been designed specifically for educational systems. The Institute for the Advancement of Emerging Technologies in Education (IAETE) developed a single school K–12 TCO calculator. CoSN and the Gartner Group (with support from the U.S. Department of Education) developed a district web-based TCO tool, Taking TCO to the Classroom.
K–12 TCO Calculator
The IAETE TCO calculator is based on a systems approach to technology. Designed to help schools estimate their total cost for technology products and services, this online tool allows the user to plan, share costs, and save up to 7% on the total budget—a significant savings. A school can enter a variety of information: current student enrollment, predicted student enrollment (5 years from now), and personnel. Technology leaders select options for various technology devices—such as peripherals, palm pilots, thin clients, and probes—which are built into the calculator. The calculator then generates output information that can be used for planning and board meetings. Essentially, this tool helps schools develop 5-year technology plans.
John Ross (personal communication, March 2005) from IAETE stresses that schools are now learning that technology integration means more than just purchasing a computer lab. On the TCO website, output data and charts provide examples of complete TCO. The numbers generated for individual schools are all based on the data that the technology leader gathered and entered. Schools sign up, and it is free and secure. Sign-up information provides a profile so that a user can return to his/her data at a later point and revise and review their information.
Ross believes that a school's individualized technology choices should be based on curricular needs. He suggests that a school's curriculum should drive the software that they purchase and that the software, in turn, should drive the hardware purchases. IAETE does market surveys of comparable prices and, therefore, has accurate pricing information. It keeps the calculator current with pricing, which could change significantly in just 6 months time. Schools may revisit their data and recalculate based on current market prices as many times as they would like. This tool is found online at http://129.71.174.252/tcov2/
Taking TCO to the Classroom
This district-wide, K–12, web-based TCO tool by CoSN and The Gartner Group offers two resources. First, CoSN provides a white paper explaining TCO and the results of in-depth TCO studies of four United State school districts. Second the TCO tool produces an individualized report that contains calculated TCO metrics based on data input by the district. Explanations of the content and importance of each metric, along with the “high and low” from the case study districts, are also provided in the report. The tool is available to all public and private K–12 institutions in the United States . Gartner (2003) explains the benefit of the tool and the case studies, saying “The case study TCO numbers provide a reasonability check for your own numbers and the case study scenarios should provide some insights into how data has been analyzed for other districts” (p. 3). This tool can be found online at http://classroomtco.cosn.org
Conclusions
Educational technology decisions need to be based on educational profit (i.e., the effective management and teaching of students). Damien Wong, vice president and general manager of research firm META , remarks,
The key thing I hear is it’s not just about tools. I think the mentality is buying a tool, but what you really need is a hole in the wall, not a new drill. So at the end of the day it’s all about the application of the tool in the right context and for the right purposes, which are important. (Lui, 2005, p. 4)
TCO analysis is a powerful tool that can inform and represent the true amount of money spent on technology. However TCO analysis does not determine the value of the technology. This is done by another analysis, Return on Investment (ROI) which can provide quantitative data above the value of technology investments. Together, TCO and ROI are powerful tools that will aid technology leaders in educational settings.
References:
Bailey, J. T., & Heidt, S. R. (2003). Why is total cost of ownership (TCO) important? Retrieved April 2005, from http://www.darwinmag.com
Christiansen, C. A., & Cosgrove, L. (1998). A TCO analysis for lotus domino migration. Retrieved April 2005, from
Emigh, J. (1999, December). Total cost of ownership. Retrieved April 2005, from
Gartner (2003). Why total cost of ownership matters. Retrieved April 2005, from https://k12tco.gartner.com
Ghazizadeh, Y. (2003) Total cost of ownership: Factors to consider. Retrieved April 2005, from
Lui, J. (2005, March). Patterns of profitability: The role of I.T. Retrieved April 2005, from
