How to calculate TCO for Software investment
(Total Cost of Ownership)
The Total Cost Of Ownership (TCO) is a holistic break-even calculation. Used to consider ordering Custom programs that are used within the organization. This is different from general purchases that are deducted as depreciation time.
Break-even-index for TCO
TCO calculation, it is a resource calculation both direct cost(direct utility) and indirect (what is affected by the change), unlike ROI, which only calculates the total benefit.
Comparison ROI and TCO
Accounting software 500,000 THB
- ROI calculation:
In the field of accounting,The software has a 5-year usage period and costs 100,000 THB each year. They will save 50,000 THB each year on staff and document management. When they computed a benefit of -50.0% each year, they concluded that the investment was not worthwhile. - TCO calculation:
The software has the same usage duration and annual charge, but there are hidden costs, such as 20,000 baht per year for software maintenance service and 300,000 baht for hardware upgrade. When all hidden fees are included in, the final cost is 420,000 baht (100,000 + 20,000 + 300,000). When considering the advantages of using. Save 50,000 baht per year on employee and document costs, 1,000,000 baht per year on mail delivery, and 100,000 baht per year on consultancy expenditures. When estimated, the benefit from usage is 1,150,000 baht, providing a 273% annual return on investment. Should be put money into it.
Conclusion
TCO calculations are used for custom software investments that have a holistic cost calculation. Before calculating the Budget for ordering production, opportunity cost, and more. which is a hidden cost of running a business.
