When making IT purchasing decisions, price is often a key criterion. When it comes to implementing a new digital product, such as a CMS, a mobile app or a new ecommerce engine, many companies choose a supplier based on the initial cost, without considering the total cost of ownership in the long term. This is why Total Cost of Ownership (TCO) analysis is key – it allows a realistic assessment of the costs associated with implementing, using and maintaining an IT solution throughout its lifecycle.
What makes up the Total Cost of Ownership?
TCO includes not only the initial purchase price, but also the costs associated with implementation, maintenance and potential risks. We can divide these into three main areas:
I. Initial costs (CAPEX – Capital Expenditure)
This is the first and most visible element of TCO – the costs you incur at the start of your investment. These include not only the purchase price of the software or hardware, but also its implementation and integration with the existing IT infrastructure. These are one-off expenses, including but not limited to:
A. Cost of purchasing licences, hardware or software
The purchase price is the first visible expense, but the amount depends on a number of factors, such as the licensing model and the technology on which the system is based.
- Software licences – depending on the model can be one-off (on-premise) or subscription (SaaS). The cost of the licence covers the basic functionality, but additional modules or extensions are often required.
- Hardware purchase – for on-premise solutions, it may be necessary to invest in servers, data storage or network equipment.
- Dedicated software – if an organisation opts for a bespoke system, there are costs for architecture design and application development.
Example:
A company decides to implement a new CMS. The cost of purchasing the basic licence is £50k, but after adding SEO extensions, content personalisation and integration with analytics, the cost increases to £75k.
B. Implementation costs – configuration, alignment with business processes, first tests
In order for a new technology to really serve its purpose, it is essential that it is tailored to the specifics of the organisation.
- System configuration – setting up users, roles and permissions, data structure and APIs.
- Adaptation to business processes – every organisation has different needs, so it is rare for a ‘ready-made’ system to work straight away without modification. This may include, for example, personalising workflow, adding integration with company databases or customising the user interface.
- Acceptance testing – before implementation, it is worth checking that the system works as expected and does not cause performance problems.
Example:
A company is implementing an e-commerce system. In addition to purchasing the platform, it is necessary to implement payment methods, configure user roles and load tests to see how the system handles heavy traffic. The whole thing extends the implementation process by 3 months and increases costs by 20%.
C. Integration costs – fit with existing IT systems and infrastructure
Very rarely does a new IT system operate as a stand-alone solution – it usually has to communicate with other systems in the organisation. Integration costs include:
- Connection to existing systems – e.g. ERP, CRM, analytics platform or customer service systems.
- Data migration – if an organisation is moving from an old system, it is necessary to analyse, convert and import data into the new solution.
- Integration testing – checking that all systems communicate correctly with each other and that data exchange does not cause problems.
Example:
A company implements a new CMS that needs to be integrated with a product database (PIM) and an AI recommendation system. The cost of the additional integrations and APIs is 40% of the value of the basic CMS licence.
II. Operating & Maintenance Costs (OPEX – Operational Expenditure)
Many companies focus on initial costs, not realising that in the long term, the costs of operating the system can exceed the initial expenditure many times over. This category includes all ongoing expenses related to the use and operation of the solution.
These are ongoing expenses that occur during the life of the solution, such as:
- Subscription and licence fees.
- Technical support, updates, servicing.
- Training and implementation costs for new users.
- Infrastructure costs, e.g. server ownership, cloud fees, energy consumption.
Example:
An e-commerce company implements a ‘cheaper’ CMS to improve content management across several digital channels. Initial licence purchase and implementation costs are in line with the budget, but after a year it becomes apparent that:
- An increase in the number of CMS users results in a 30% increase in subscription costs.
- Business development requires new integrations with the PIM system and the content personalisation platform, which generates additional expenditure.
- The cloud-based infrastructure on which the CMS runs needs to be cost-optimised, as traffic to the site has increased faster than expected.
Ultimately, the total operating costs of the system in the second year of operation are 40% higher than the original budget assumptions.
III. Hidden Costs & Risks
This is a category that many organisations overlook in their TCO analysis, which later leads to unexpected expenses. It includes, among others:
- Costs of system changes and modifications – an organisation may need additional functionality that was not originally envisaged. For closed solutions or vendors with restrictive licensing models, making changes may incur additional charges.
- Costs of downtime and failures – every IT system is at risk of failures, which can generate direct financial losses and costs associated with data recovery or restoration.
- Migration and decommissioning costs – an organisation may end the use of a legacy system and be forced to migrate data to a new solution if a particular system no longer meets business needs or its technology has been withdrawn by the vendor.
Example:
A company decides on an e-commerce platform, but after three years finds that its growth is limited and each new integration requires additional fees. The costs of migrating to another system exceed the original project budget, which only confirms the importance of including these costs at the TCO analysis stage.
How to calculate the Total Cost of Ownership and avoid additional charges?
In order to realistically assess the costs associated with owning an IT system, it is useful to take a three- to five-year perspective and compare different scenarios of technology use.
Stages of analysis:
- Defining the full life cycle of the solution – how many years will it be in use?
Not all IT systems are implemented with the same lifetime in mind. Some technologies, such as e-commerce or mobile apps, require regular updates and may be replaced every few years. Others, such as CMS systems, often run for a decade or more.
What is important in this case?
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- Planned lifetime of the system – 3, 5 or maybe 10 years?
- The pace of technology development in the industry – will the system require more frequent updates?
- Anticipated changes in the company – will the system scale as the business grows?
- Collection of all initial and operating costs – including hidden costs.
In order to reliably calculate TCO, it is necessary to add not only the initial costs (CAPEX), but also the ongoing operating expenses (OPEX).
What should be taken into account?
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- Purchase and implementation costs – licences, hardware, integrations, testing.
- Operating costs – subscriptions, cloud fees, system administration.
- Hidden costs – downtime, regulatory changes, need for additional functionality.
Many organisations focus on upfront costs, but it is crucial to consider the full TCO – from implementation to long-term maintenance – at the vendor selection stage. Mistakes made at the tender stage can lead to unexpected costs, such as the need for additional integrations or project delays that increase operational expenses. How can they be avoided? Check out the most common IT tender mistakes and learn how to prepare the vendor selection process well.
3. Scenario analysis – e.g. cost of infrastructure ownership vs. cloud solution.
Companies are often faced with a choice: on-premise infrastructure or a cloud solution? Each of these options has costs and long-term implications.
What is worth thinking about?
- Cost of purchasing and maintaining servers (on-premise) vs. cloud subscription fees (SaaS, PaaS, IaaS).
- Flexibility of the solution – will the cloud allow the system to scale better?
- Security and regulatory compliance – where will data be stored?
The TCO analysis should include different models for working with the supplier. In some cases, instead of the classic billing model, it is worth considering a performance-based approach, in which costs are linked to the achievement of specific goals.
Such a model allows you to better control operational expenditure and avoid IT services generating fixed costs but not translating into real business results. If you are wondering how this works in practice, read more about the goals-based billing model.
4. Include risks – e.g. costs associated with system maintenance or expansion.
Every IT system involves risks that can generate additional costs. It is worth identifying them and taking them into account in the TCO analysis.
The most common cost risks:
- Scaling costs – will the system require more computing power in the future?
- Costs of regulatory changes – e.g. compliance with new legal requirements (e.g. EAA, GDPR).
- Costs of unplanned failures – supplier SLA, response time to service requests.
Why is TCO crucial in IT purchasing?
Total Cost of Ownership (TCO) is a key indicator for companies investing in new technologies. Its analysis makes it possible to:
- Avoiding hidden costs
The cheapest offer rarely turns out to be the best in the long term. Often, low initial costs mean high operational expenses, the need for integration, additional modules or scaling costs. A TCO analysis allows a realistic estimate of the total expenditure and avoids apparent savings turning into long-term losses.
- more effective budget planning
Considering the full lifecycle of an IT system allows organisations to better forecast expenses and minimise the risk of unexpected costs. This makes IT budgets more predictable and allows companies to avoid situations where unplanned expenses such as licences, migration or maintenance suddenly arise.
- objective comparison of offers
TCO is a tool that allows a reliable assessment of which option is truly cost-effective. Instead of being driven solely by purchase price, organisations can take into account maintenance costs, technical support, potential risks and the flexibility of system development. As a result, the choice of IT supplier becomes more informed and based on a long-term investment.
- implementation of a long-term IT strategy
A TCO-conscious approach helps companies to better manage IT resources, minimise the risk of technological debt and avoid costly changes in the future. Systems chosen with TCO in mind tend to be more scalable, easier to maintain and less prone to vendor lock-in issues.
Before you choose an IT provider: ask about the total cost
Initial costs are only part of the investment. To avoid unexpected expenses and choose a partner who understands your organisation’s needs. Download checklist-of-questions as a PDF📧 and find out what questions to ask your IT provider to make sure their offering meets your needs and long-term goals.
Author
Michał Łukawski
IT Client Partner
With more than 17 years of experience in the IT industry, Michal Lukawski supports corporate clients in creating and developing digital products that respond to real business needs. He served as Managing Director of SYZYGY Warsaw and was part of the team responsible for the organisation’s transformation to turquoise. His approach combines an understanding of business needs with building lasting relationships based on transparency and shared responsibility.
Author, among others:
Plan a smart IT investment – minimise costs, maximise value
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- Reliably analyse the TCO for your IT project
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