Total Cost Of Ownership: Why It’s Important

Total Cost Of Ownership: Why It’s Important

“The initial cost savings are going to be huge.”

How many times have we heard that line from a sales person selling us a product or service? Or after exhaustive research and calculations, came to that conclusion ourselves?

It’s pretty compelling, isn’t it?

Not only does a huge savings in the initial purchase make us look good and is great for the bottom line but it makes us FEEL good too! Everyone loves a bargain. It releases endorphins and a wave of adrenaline from the excitement.

But does this momentary rush of euphoria prevent us from seeing the BIGGER picture?

Did you know that acquisition costs account for only 25-40% (averaging to 33%) of the total cost for most products and services?

Total Cost Of Ownership


The concept of Total Cost of Ownership (TCO) focuses on the total cost of owning or consuming a product or service beyond the initial purchase price.  It emphasizes true value over initial costs.

Over the life cycle of a product or service, after the initial purchase, the areas that contribute to the total cost are:

  • Operation
  • Training
  • Maintenance
  • Warehousing
  • Environmental
  • Quality
  • Transportation
  • Salvage/Disposal

With so many factors contributing to a product or service’s life cycle cost, it would seem that making a high value purchase effectively cannot be done in a bubble. Sitting at your desk with several vendor catalogs and a list of specifications is simply not enough. It would require receiving information, feedback and experiential knowledge from multiple entities within an organization, as well as external sources, to come to an informed decision, beyond the focus of that low initial price.

This is where strategic sourcing comes in. Strategic sourcing is an interactive, collaborative, and structured process of critically reviewing an organization’s spend. This is designed to optimize its procurement practices, supply chain results and improve the overall value proposition. This includes lowering the total cost of ownership.

Strategic Sourcing creates an environment of shared benefit and stake-holding but also results in lower total cost, streamlined processes, increased responsiveness to customers’ changing needs, and increases the value of each dollar spent.

If you would like to learn more about Strategic Sourcing, this topic will be discussed in one of our next blog posts.

You can also get more information on it and on other topics related to IT procurement by downloading the e-book Roadmap to Best Practices of IT Integrated Procurement™.