Total Cost of Ownership vs Return on Investment (Roi)
Total Cost of Ownership: This is defined as the an approach for measuring financial returns which involves consideration of all the additional costs required to support and maintain the item purchased for its full useful life and adding such costs to the purchase price (Reh, n.d).
Calculating TCO
No general formula for calculating TCO exist the general principle is Purchase Costs + All other additional costs. In IT investments some additional costs might be cost of maintenance, support costs, upgrade costs, licenses costs, training costs, repair costs, insurance costs, security costs etc. Advantages of TCO * The TCO approach takes all involved costs into consideration, and can be seen as an effective tool for doing a proper cost-benefit analysis on an item. * The TCO is an effective tool for evaluating the benefits of outsourcing deals. * TCO effectively uncovers some of the often hidden costs involved in the lifecycle of the item. * TCO can be used in sensitivity analysis for cost management and analyzing the long term impact of cost improvement by changing a supplier.
Disadvantages of TCO * It’s often challenging to effectively track and identify all necessary costs that can be incurred in the lifetime of an item. Since the general accounting mechanisms are not in place to capture all the costs incurred, some hidden costs might often be overlooked. * The TCO is a deterministic model that often relies on unrealistic data and predictions, which might easily change; and such changes might effectively influence the outcome of the model. * Because of the deterministic nature of the TCO, it is often reliant on historical data. * This model often ignores the elements that cannot be mathematically represented, like opportunity cost and business risks.
Definition of 'Return On Investment - ROI '
The investopedia.com (n.d) defines ROI as “A performance measure used to evaluate the efficiency of an investment or to compare the
Calculating TCO
No general formula for calculating TCO exist the general principle is Purchase Costs + All other additional costs. In IT investments some additional costs might be cost of maintenance, support costs, upgrade costs, licenses costs, training costs, repair costs, insurance costs, security costs etc. Advantages of TCO * The TCO approach takes all involved costs into consideration, and can be seen as an effective tool for doing a proper cost-benefit analysis on an item. * The TCO is an effective tool for evaluating the benefits of outsourcing deals. * TCO effectively uncovers some of the often hidden costs involved in the lifecycle of the item. * TCO can be used in sensitivity analysis for cost management and analyzing the long term impact of cost improvement by changing a supplier.
Disadvantages of TCO * It’s often challenging to effectively track and identify all necessary costs that can be incurred in the lifetime of an item. Since the general accounting mechanisms are not in place to capture all the costs incurred, some hidden costs might often be overlooked. * The TCO is a deterministic model that often relies on unrealistic data and predictions, which might easily change; and such changes might effectively influence the outcome of the model. * Because of the deterministic nature of the TCO, it is often reliant on historical data. * This model often ignores the elements that cannot be mathematically represented, like opportunity cost and business risks.
Definition of 'Return On Investment - ROI '
The investopedia.com (n.d) defines ROI as “A performance measure used to evaluate the efficiency of an investment or to compare the
References: Jack Fox (2000) 'Is that IT investment paying off? Check the TCO ', 7th January [online] Available at: http://www.techrepublic.com/article/is-that-it-investment-paying-off-check-the-tco/1028383 (Accessed 20th January, 2013) F. John Reh (n.d), about.com 'Total Cost of Ownership (TCO) ' [online] Available at: http://management.about.com/od/money/a/TCO.htm (Accessed 20th January, 2013) www.maxi-pedia.com (n.d) 'Return On Investment (ROI) ' [online] Available at http://www.maxi-pedia.com/Return+on+Investment+ROI (Accessed 20th January, 2013) investopedia (n.d) 'Return On Investment - ROI ' [online] Available at: http://www.investopedia.com/terms/r/returnoninvestment.asp#axzz2LT7aHBMZ (Accessed 20th January, 2013) Biblography pingopower (2004) 'The advantages/disadvantages of the total cost of ownership ' [online] March Available at: http://www.writework.com/essay/advantages-disadvantages-total-cost-ownership (Accessed 20th January, 2013) Jay Way (n.d), eHow Contributor 'The Advantages of Using Return on Investment ' [online] Available at: http://www.ehow.com/list_6754512_advantages-using-return-investment.html (Accessed 20th January, 2013)