Just What Is TCO, Anyway?

Buzzwords fly into and out of the language of computing all the time, but only a few stay around to influence the way we buy--and the way vendors sell--computers and computer software. One buzzword that seems destined for longevity is total cost of ownership (TCO). Used well, TCO is a terrific tool for determining how to get the most computing for the least money. Used poorly, TCO is a high-tech way for vendors to prove that, yes, your first impression was right--a big shiny nickel is clearly better than a dinky little dime, so why don't you take this big shiny nickel and we'll get rid of that piddly dime for you?

TCO has made headlines for two reasons. First, the idea of examining relative costs makes sense. Second, Microsoft competitors Sun Microsystems, Oracle, and Netscape attempt to use TCO to demonstrate that Microsoft solutions are not cost-effective. This strategy forces Microsoft to use TCO to counter that its competitors' products are not cost-effective. Careful examination reveals that none of these industry giants computes TCO in the same way or with completely objective criteria, but at least they've brought an important issue to center stage. Understanding TCO is easier if you understand where TCO comes from, what the two most vocal players--Microsoft and Sun--are claiming about TCO, and why accurately computing TCO figures is so hard.

TCO's Story: PCs Cost Too Much
Here's the foundation of TCO: PCs cost too much. That claim might seem obvious today, but it wasn't always. Back in the late 1970s, when the first appliance microcomputers (the ones you didn't have to solder to make work) appeared, the machines were a godsend for scientific and technical users. In those days, as an econometrician (an economist who analyzes economic statistics and builds models that help people understand economic markets), I couldn't compute the simplest statistics on a pile of numbers without having to submit my calculations to the local mainframe as a batch job--a job whose processing might take hours. The advent of simple microcomputers meant I could piece together my own BASIC programs and get my statistics in minutes instead of hours. So of course I wanted a desktop microcomputer.

How did I justify asking my company to buy one of these computers? Cost. Mainframes cost millions of dollars, I argued, but a decent basic desktop microcomputer was available for about $3000, which was less than 10 percent of my salary. If I completed three times as many statistical jobs in a day, wouldn't I be more productive? At the time, productivity was a buzzword, so I got the computer. I was arguing that although buying a desktop computer would cost money, not buying the computer would mean I would waste time, which also costs money; therefore, I'd lower total costs if I had a desktop computer. The mainframe guys didn't like my having a computer, but the fact that a desktop microcomputer delivered a far better response time than their mainframe delivered carried my argument.

In the mid-1980s, nearly every private firm and government organization looked hard at whether to buy PCs. Nearly all of these groups decided to buy-- not because of cost considerations but to facilitate office automation. There wasn't a lot of software to run on the computers of the late 1970s, so many companies didn't buy computers in quantity. With the flood of word processing, spreadsheet, and database programs that appeared in the mid-1980s, all of a sudden the mainframe guys faced another argument: Mainframes simply couldn't do things such as word processing and creating spreadsheets, and graphical computing of any kind on a mainframe system was cost-prohibitive. In this context, PCs weren't competition for mainframes but for calculators and typewriters. The initial cost of PCs was more than that of calculators or typewriters, but the productivity argument won again: PCs were cheap compared with the time spent by the people who used them.

Today, nearly 25 years after the first Altair 8080-based microcomputers appeared, PCs are a fixture of home and enterprise life, and US business probably couldn't exist without them. The question today is, should we keep to the path of incessant hardware and software upgrades? Or to put it simply, should we keep throwing money at desktop computers?

Many PC proponents argue that PCs increase productivity. However, documenting such increases is hard. For example, from the end of World War II to 1974, US nonfarm productivity rose over 3.4 percent per year. But from 1974 (the year the Altair was introduced) to today, annual productivity growth has averaged only about 1.2 percent. It's hard to argue that PCs have increased productivity if you use annual productivity growth figures as evidence. It's even harder to argue that PCs increase productivity if you analyze computing costs now that computing's focus has shifted from centralized mainframes to decentralized PCs and LANs. For example, consider that in the 1960s, the average Fortune 500 company spent about 1 percent of its gross income on computing; today that company spends about 3 percent of its gross income on computing.

One of the fastest-growing areas of employment is in jobs with titles such as PC support, network specialist, NT administrator, and email administrator. All these people cost something, even though their jobs barely existed 10 years ago. Support folks aren't the only PC-related cost component. Sure, we probably save time by using word processors, spreadsheets, and email. But stack those gains against entire days spent installing new versions of operating systems (OSs) and applications, and hours re-creating lost work, figuring out software upgrades, surfing the Web, and--let's face it--playing Solitaire. Add to the purchase price of PCs the salaries and other costs of the people who keep the networks and PCs running, and you can see why some feel that PCs are less than a productivity panacea.