How one should base the decision on buying a product

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CeeKay Consulting – Realize Vision
TOTAL COST OF OWNERSHIP
Right Way of Decision making

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• Introduction 15 Mins
• Understanding of TCO 45 Mins
• Group Discussion 25 Mins
• Break 15 Mins
• Case Study 60 Mins
• Closure 15 Mins
Jai Shri Krishna
Agenda

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• What will you buy
– A car costing 5000 $ with 16 miles/litre milage or
a car costing 6500 $ with 21 miles/litre mileage
Few Questions

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Total Cost of Ownership
UPFRONT COST
RECURRING
COST

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Total Cost of Ownership
UPFRONT COST
RECURRING
COST
Transportation
Warehousing
Packaging
Utilization
Inventory
R & D
Capacity
Specification
Data Warehousing
Field Failures
Purchase process Cost
Opportunity
Purchase price

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• If you buy a bus, you must also budget for:
 Gasoline
 Maintenance
 Repairs
 Increased Insurance Premiums
 Another Driver
TCO

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• If you build a network or purchase computers,
you must also budget for:
 Software
 Maintenance & Repairs
 Increased Utility Costs
 Support
 Staff Development
 Replacement Costs
ALSO….

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• TCO (total cost of ownership) is a type of calculation designed to assess
both direct and indirect costs and benefits related to the purchase of any
component. The intention is to arrive at a final figure that will reflect the
effective cost of purchase, all things considered.
• TCO looks at the complete cost from purchase to disposal. It adds to the
initial purchase price other costs expected to be incurred during the useful
life of the product, such as service, repair, and insurance.
• When making a financial comparison between two choices or among
several choices, smart managers look at the total cost of ownership (TCO)
not just the purchase price.
Total Cost of Ownership

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 Understand all of the costs that will need to be
covered to support technology adequately
 Understand the potential long-term costs of a
particular approach
 Understand direct and indirect (“hidden”) costs
 Help develop a technology vision you can
support for the long term
 Continue to evaluate the choices you’ve made
How Total Cost of Ownership Analysis Can Help

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• Decision
– To Build internally
– Or License
• Fundamentals of decision
– Maximise Shareholder Value
– Maximise ROI on investment
• Three Pillars of ROI Analysis
– T.C.O
– Functional Capabilities
– Project Risk
TCO – Critical to Decision Making

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1. TCO analysis enables
organizations to identify,
project, measure, and track
direct and indirect costs of a
localization technology
initiative.
2. As the TCO of a project
increases, the ROI decreases.
3. There is an inverse
relationship between TCO and
ROI.
A low TCO not only reduces an organizations operational costs, but
also effects the financial success of a localization technology
initiative as measured by ROI.
TCO Vs ROI

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An ROI Case
Return on Investment
Requested by those focused
primarily on operating budget
who want to save money
Generally limits you to a strict
“hard dollar” view – if it won’t
show up in the expenses lines, it
won’t be in the case
- Tougher for applications like
mobility for sales force
productivity
A TCO Case
Total Cost of Ownership
Requested by those aligned with
business strategy, marketing, lines of
business who want to justify an
investment to enhance the business
Opens up the possibility for
productivity and revenue benefits
- Often the focus in contact center
sales
• The majority of the effort is identical for both types of analysis.
• The more that the investment delivers productivity and revenue benefits,
the more likely the focus will need to be on ROI
The basics of TCO and ROI cases

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Total Cost of Ownership Reduction Approach
Standardization
CentralizationAutomation

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CeeKay Consulting – Realize Vision
• Tipper (16 Ton)
• Personal Computer
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TCO Examples

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T
C
O
Deployment
The Blade PC desktop and server-side computing models have significantly higher deployment costs than the rich client
computing models.
Power
The Terminal/Presentation server model has the lowest power costs. Power costs for all models however, account for only
a small fraction of the overall TCO.
Manageability Manageability costs are lowest with server-side and Blade PC desktop computing models.
Productivity/
User
experience
• The shared nature of server-side platforms and the slow nature of Blade PCs hinder user experience and productivity,
particularly in the case of knowledge or power users.
• Combining well-managed rich clients with application streaming and/or OS streaming can provide all the benefits of
server-side computing models without significantly affecting productivity.
• Productivity loss can be significant for knowledge or power users on server-side and Blade PC desktop models.
• Because lost user productivity can easily be higher than any of the other costs in this analysis, enterprises need to
consider those costs carefully.
Total cost
TCO is the sum of acquisition costs and sustaining costs. TCO for server-side and Blade PC desktop computing models is
higher than for client-side computing models primarily due to deployment costs and productivity losses.
Security All other platforms we examined offer considerable security improvements over Typically managed rich desktops.
Future proofing/
rich application
support
Client-side computing models based on rich desktops and notebooks offer significant future-proofing benefits over server-
side and Blade PC desktop models. Notably, server-side models offer limited multimedia and rich collaboration support as
well as limited Flash-based Internet usage.
Desk-side
environmental
Smaller and usually cooler and quieter than rich clients, thin clients used in server-side and Blade PC desktop models have
less of an impact on the desk-side environment.
Compliance All other computing models we examined offer significant compliance benefits over Typically managed rich desktops.
Performance
Client-side computing models showed impressive performance gains over server-side and Blade PC desktop models in
our tests.
Mobility True mobility support is available only with the application streaming computing model.
Total Cost of Ownership - PC

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• Depreciation Cost
• Financing Cost
• Insurance Cost
• Taxes (Road, State etc)
• Fuel Cost
• Tires Cost
• Maintenance Cost
• Repairs Cost
• Drivers Salary
• Management & Overhead Cost
Cost Elements of Tipper TCO

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• Straight Line Method of depreciation considered
• Total Interest calculated @ 15% reducing balance and equally spread over
8 Years
• Insurance cost calculated on Book Value each year
• Running of 15 Hrs/day for 300 Days in a year and mileage of 5Km/Litre
with running of 200 Km/day considered
• ` 30/Litre considered as rate of fuel (Diesel)
• 16 Ton vehicle considered with 6 Tire vehicle (2 front & 4 back)
• Consumption of 2 tires per year per hub considered
• Repair & maintenance spread on BV across 8 years (costs to be minimal in
first 3 years)
• 2 drivers considered to be taken with ` 10,000 CTC/Month
• Overhead considered on Employee and other costs
• Inflation cost not adjusted
TCO Calculation of Tipper: Assumptions

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TCO Calculations Assumptions
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Salvage Value

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TCO Tree for Tipper
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TCO Calculations
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Net TCO for the Vehicle = TC – Salvage = `11,361,476

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• TCO for a Tipper costing ` 2,500,000 is ` 11,361,476 for 8 years
• For leasing the payout, without considering margins and service
tax, should be ` 118,349 per month inclusive all
Results
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Chand Krishan Raina
B.E. Mechanical (REC Surathkal/ NITK)
MBA Finance (ICFAI)
chandkd@yahoo.com
in.linkedin.com/in/chaandkraina