What is Total Cost of Ownership (TCO)?

Cost of Ownership, TCO, Total Cost of Ownership

Total cost of ownership (TCO) is a financial estimate used by companies to determine both the direct and indirect costs associated with a product, service or solution. TCO is often used to compare two or more offerings when evaluating a potential purchase. For cloud infrastructure, TCO is the acquisition and operating costs of running an end-to-end environment. Comparisons often include running all IT infrastructure or specific workloads on-premise or in a co-location facility versus in the cloud. They also include budgeting and building the business case for the best option.


When doing a TCO analysis, companies typically face five key challenges: 1) Comparison. Creating an accurate cost baseline for comparison. 2) Cost. Has hardware been fully depreciated? Is the migration outside of a hardware refresh cycle? What impact will time and effort have on the migration and decommission process? 3) Fear. Resistance from IT due to perceived loss of control or potential staff reductions. 4) Financial. Moving from capital expense to operating expense. 5) Timing. Legacy applications or workloads not being ready or not immediately benefitting from the cloud.

While all five key challenges must be addressed, creating an accurate cost baseline for comparison is the primary subject of this post. Companies often struggle with it because: 1) Facilities. Space, power and cooling are estimates made by corporate making them difficult to link to specific hardware. 2) Insight. Business unit allocation and chargebacks are not understood. 3) Inventory. Lack of a complete inventory, including how applications map to specific physical or virtual hardware, as well as hardware performance and utilization tracking (servers, racks, etc.).


When performing a TCO analysis, start by asking the following questions. 1) Capacity Planning. If you experience an increase or (long-term) decrease in client or user demand, is your IT infrastructure elastic, enabling you to only pay for what is used? 2) Operational Challenges. Will you run out of space, power or cooling in the future? What was your utility bill last year? Have you budgeted for both average and peak power requirements? 3) Server Utilization. What is your average server utilization? How much is over-provisioned for peak load?

For on-premise and colocation, TCO includes labor, network, server and storage. The cost of hardware, software and other overhead must also be included. Labor costs are calculated the same for on-premise and colocation. Server and storage costs are calculated the same unless hardware is leased. Key calculation differences include: Bandwidth is a flat fee for on-premise and a tiered fee for colocation. Power and cooling are charged separately for on-premise, but included in the fee for colocation. In contrast, the following are included in the publically listed prices for AWS.*

* Storage redundancy, network and server hw, o/s and virtualization sw, datacenter labor, cooling, power and space.


According to IDC, over a five-year period, companies save an average of $519,000 per application using cloud provider Amazon Web Services (AWS). How do companies lower their TCO with AWS? 1) Choice in pricing models. AWS supports both steady-state and variable workloads via on-demand, reserved and spot instances. 2) Economies of scale. AWS has lowered its prices 42 times since 2006. 3) Increased savings as your environment gets bigger. Leverage tiered pricing and volume discounts. 4) Shift to variable cost. Replace up-front capital expense with operating expense.

However, comparing on-premise and co-location with (pay-as-you-go) cloud is not an apples-to-apples comparison; it is an apples-to-oranges comparison. To be accurate, the right instances must be selected. Hardware consolidation via virtualization must also be considered. Fortunately, the new TCO calculator from AWS helps companies quickly and easily generate accurate comparisons without spending months gathering data and creating models. Companies can drill into individual costs and have full transparency into the assumptions and methodology behind the calculations.


The following are five TCO best practices or tips for performing an analysis/comparison. First, associate cost and value to non-tangible items such as agility, lost opportunity, etc. Second, avoid an apples-to-apples comparison of on-premise and co-location with cloud. Third, build the TCO analysis collaboratively with key functional stakeholders (avoid using an unchecked TCO comparison only performed by one individual). Fourth, do not focus purely on discounts and pricing. Fifth, do not wait to bring TCO late into the decision-making process. Good luck.

All contents copyright © 2014, Josh Lowry. All rights reserved.


3 Responses to What is Total Cost of Ownership (TCO)?

  1. Brett Boisemenu says:

    Great post. Very helpful to understand the basics of cloud TCO. I will check-out the AWS TCO calculator too. Thanks.


  2. Kimberley Tiemann says:

    Interesting post. Good read.


  3. SutoCom says:

    Reblogged this on SutoCom Solutions.


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