TCO (Total Cost of Ownership) is the method for evaluating the direct and indirect costs of a product in order to quantify its real value and everything that is required to make it work. TCO provides better economic predictability before making an investment or purchase.
The concept of TCO from a business perspective dates back to the early 19th century, when engineers tried to assess the effectiveness of their cannon through an analysis of their service life and repair requirements.
Since then, TCO has been used by companies to understand production costs more accurately and therefore better determine whether or not the acquisition of a new tool makes sense for their business. In this article we will focus on the importance of calculating TCO as an investment manager, and how to do it.
Before you buy a house, you don't just view houses in relation to their price. You look at a variety of factors, such as location, energy efficiency, structural soundness, maintenance costs, and whether it meets your family's future needs.
When looking for an investment management solution, the same methodology applies. To get the most out of your technology spend, look beyond the price and core features for the hidden costs that add up over the life cycle of the solution.
Rising costs and investor demands have led to a greater focus on how resources are allocated within investment firms and finding the optimal balance between cost and value has become more important than ever. When it comes to an investment management tool, calculating the TCO is crucial to determining its long-term value and feasibility.
When evaluating different investment technology providers, there is a general lack of transparency regarding costs, which can be frustrating and confusing for an investment manager.
Much of this confusion stems from the fact that the price quoted on a vendor's proposal is almost never the TCO of the solution. Regretting an investment management solution is not uncommon for investment management companies that are hit with unexpected costs that push them over their budget expectations.
The source of the price gap between a solution's proposal and its total cost of ownership comes from hidden costs, which are not disclosed upfront, and can have a significant impact on the total cost over time.
However, there may also be 'hidden values' that provide compounded benefits over time without any unpleasant cost surprises.
Hidden costs and hidden values need to be taken into account so as to be able to accurately compare vendors and understand which solution offers the best value.
We have developed a simple way of calculating the TCO of an investment management solution to help you find out both the true total value and the true total cost.
Basic requirements - hidden costs + hidden values = TCO
Core business requirements are the capabilities you expect from any investment management software provider. They should be the minimum set of features that vendors offer to meet your most basic business needs. Any potential candidate who cannot meet these requirements should be ruled out early in the selection process.
The core functional requirements for investment management technology solutions may include the following:
Hidden costs are not initially indicated in a supplier's price proposal, but nevertheless, accumulate throughout the lifetime of the solution in your organisation.
Examples of hidden costs are:
The 'hidden values' of a solution add value either upfront or as your business grows but are often overlooked when assessing the total cost of ownership of investment management software.
By assessing the TCO of a solution, rather than simply comparing upfront costs, you can more accurately compare vendors and determine which solution will deliver the most value to your business over the long term.
Since 2006, JUMP has been developing and marketing innovative business software for investment management professionals. The JUMP software platform is designed to meet the current and future needs of our customers.