What Is TCO?
TCO was originally developed in the late 1980s by the research firm Gartner to determine the cost of owning and operating personal computers in an organization. Studies regularly show that, even in today's world of PCs costing less than $1,000, the TCO of a PC continues to average over $5,000 per year. Simply stated, TCO consists of the costs, direct and indirect, incurred throughout the life cycle of an asset, including acquisition, deployment, operation, support and retirement.

To illustrate the Total Cost of Ownership for a software purchase, we will use a example of an advisor who is trying to estimate the cost of buying a hypothetical financial planning software package called AccuFigure. Much to the advisor's surprise, direct costs account for only 24% of the software's total cost with indirect costs making up the remaining 76%.

To calculate your own costs, use the Real Cost of Software calculator.

Direct Costs
The annual license fee for AccuFigure is $750 per year and support is available for an additional $250 per year. Accufigure has a medium learning curve and the advisor decides to take a one day training session for $250. The training is available on-line so the advisor doesn't have to incur any travel or accomodation costs for the training. Total direct costs amount to $1,500 ($750 license fees + $250 support + $250 training).

Indirect Costs
Indirect costs include training, support and other costs such as software upgrades, installation, hardware and network upgrades.

Training
Taking a one day training session with the vendor gives our advisor a jump start with the software. However, he will likely need to spend additional time on his own learning the software, often through trial and error. This can be a considerable indirect cost, given the value of his time. For example, the cost would be $1,000 if he spends 10 hours learning the software assuming an hourly rate of $100. His assistant also needs to learn the software in order to input client data. If he spends 20 hours learning AccuFigure at an hourly rate of $30, add another $600 in indirect training costs to bring the total to $1,600.

Support
Time spent on support calls and emails can add up over the year. If we assume the same hourly rates, indirect support costs would amount to $1,560 if our advisor and assistant each spend 1 hour per month on support issues.

Other Indirect Costs
Accufigure works on a network and requires the most recent versions of Excel and Windows XP. Our advisor hires a local computer consultant to upgrade his computer and the assistant's computer with the latest Excel and XP versions and configure the network. The consultant's fee for this work is $750.

Bottom Line
In our hypothetical example, direct costs account for only $1,250 or 24% of Accufigure's total cost of $5,160 in the first year. Indirect costs make up an astonishing 76% of the total cost.

To calculate your own costs, use the Real Cost of Software calculator.