What Is The Total Cost Of Ownership (TCO) Of IT Infrastructure And What Costs Should Be Taken Into Account

A company needs to know how much money is spent annually on maintaining the IT infrastructure. For the assessment, TCO is considered – the total cost of ownership. Let’s figure out what it is and what approaches to counting exist.

What is TCO, Or Total Cost Of Ownership?

TCO (Total cost of ownership), or total cost of ownership, is the total cost that a company incurs due to the ownership of an asset, for example, an IT infrastructure.

When calculating TCO, the main thing is the correct analysis and accounting of all costs. This is especially important when choosing corporate IT systems, which are becoming more complex and include many components.

It is generally accepted to divide costs into two categories: initial and operational. Let’s see what applies to each type when it comes to IT infrastructure:

1. Initial Costs – the cost of purchasing, installing, and configuring hardware and software, IT systems.

2. Operating Costs – are all subsequent costs. Among them are the renewal of software licenses, salaries of maintenance personnel, costs associated with equipment maintenance.

After calculating the total cost of ownership for several options for building infrastructure, you can choose the best one. For example, to understand what is more profitable: maintain your data center or transfer data to a cloud platform.

How To Calculate The Total Cost Of Ownership Of An IT Infrastructure: Two Calculation Methods

There is no single approach to calculating TCO – the methodology largely depends on the company’s specifics. But today, two methods of counting are most common: the first was proposed by Microsoft and Interpose, the second – by the Gartner Group

Methodology For Calculating TCO Microsoft And Interpose

According to this model, all costs are divided into two types: direct and indirect. Direct costs are costs that are usually taken into account when planning a company’s budget.

What are the direct costs:

• purchase or lease, implementation, configuration, and software update;
• design and administration of systems and networks;
• maintenance of the technical support staff, training of employees, payment for technical support on outsourcing;
• development and testing of applications, preparation of technical documentation;
• creation and maintenance of communication channels.

With indirect costs, everything is more complicated: as a rule, they are not considered when planning a budget. At the same time, more than 50% of companies’ expenses on IT are indirect – this conclusion follows from the Interpose study.

What are the indirect costs:

• Informal user training, personal support for key clients of the company
• In general, all the costs that arise while interacting with users.
• Costs that arise due to temporary interruptions in work
• For example, due to equipment breakdown or scheduled maintenance.

Methodology For Calculating TCO Gartner Group

According to this model, IT systems’ costs are divided into two groups: capital (CAPEX) and operating (OPEX).Capital or, in other words, fixed costs, as a rule, arise only once – when you create an IT system. Operating or current costs are all that arise during further exploitation. The number of operating costs directly depends on the decisions made in the company during the implementation of the IT system.

How To Take Into Account Costs When Calculating TCO For IT Infrastructure

Let’s look at an example of what costs should be considered if we want to compare TCO for IT infrastructure hosted in our data center and on a public cloud platform.

To make such a comparison, in practice, computing resources are reduced to a common denominator – the number of resources that you receive in reality. Resources are selected to provide similar functionality and SLA infrastructure on-premise and in the cloud. That is, the servers, storage systems, and other computing resources of the two compared infrastructures must equally meet the project’s requirements.

Let’s say we want to calculate expenses three years in advance.

For our own data center in the first year, we consider:

• Datacenter: placement of equipment or organization of your server room;
• server and network equipment, storage systems;
• everything that is required for information security: crypto gateways, Firewall, and other costs;
• Internet with a connection from several providers;
• virtualization platform;
• backup system;
• software licenses such as antivirus, Microsoft licenses, and others;
• disaster recovery, if necessary, the system is duplicated by two data centers.

For the next two years, we add to the received cost 20% for each year – approximately the same amount is usually allocated for the modernization and repair of server equipment.

For the cloud, consider the capacity that a company needs to cover all needs. We add 20% to the received value for each year of rent for the next two years. Approximately so much is allocated for the increase in capacity required for the growth of the project.

Also Read: The Concept And Essence Of Business Processes