How to recognize the hidden elements in TCO calculations
Most IT organizations must calculate the total cost of ownership (TCO) of all technology hardware, software, staffing and services in order to demonstrate return on investment. Unfortunately, too few organizations get the calculations right.
The problem often lies with IT leaders that focus on upfront or operational expenses but fail to connect IT costs with eventual business outcomes. They model just on spend, and fail to consider efficiency, compliance and long-term value.
“Most companies struggle with accuracy,” says Greg Bibeau, CEO at national IT services firm Terminal B. “IT leaders generally do a great job nailing down direct costs, but miss the indirect ones, such as disruption or reduced productivity of employees. That is why studies have indicated that a lot of these TCO calculations miss real world-expenses, causing budgets to miss their target by double-digit percentages.”
Estimating costs can be challenging, but for an IT leader, it’s part of the job requirement. Making those projections accurately can help give you the flexibility to make better strategic tech investments in the future. As the various IT leaders we interviewed describe, it’s accounting for less obvious costs like scattered licenses, disposal and others that can help you fine tune your estimates.
So many costs, so much math
Regina Manfredi, president, North America region at Software One, confirms that most organizations struggle with accurately determining IT total cost of ownership. As a former executive vice president and general manager at software firm Crayon, Manfredi cites Crayon’s IT Cost Optimization Report which found that organizations face “persistent challenges” estimating their costs, and that 44% have limited visibility into their cloud spending, making tight control and management difficult. Only 19% of organizations have FinOps fully integrated as a cross-team strategy, which is a key framework for gaining control and visibility over IT spend.
Elements most likely to be overlooked are the “long tail” of small software licenses and the associated costs of AI operations, Manfredi explains. These small, fragmented licenses can account for up to 20% of an organization’s software spending, making them a significant hidden cost.
Additionally, many organizations are still in an ‘experimentation’ phase with AI, and the full scope of AI costs and governance requirements may not be obvious. Some organizations simply need more guidance on best practices at managing AI spend.
Many organizations also run into problems with TCO estimates that underestimate IT integration and training costs. They may overlook ongoing support and security, or fail to account for productivity gains and end-of-life expenses, explains Hugh Cumming, CTO at Vena Solutions, which designs software for financial planning and analysis (FP&A).
“It’s usually the hidden or indirect costs, not the obvious upfront ones, that create the biggest errors,” Cumming says.
The most commonly overlooked IT costs
Even when an organization recognizes and includes a general cost category, it can easily overlook individual elements. Examples include indirect costs such as employee training, downtime during implementation and productivity gains, or the shared expenses that get buried in other budgets, such as cloud services, cybersecurity, and compliance, Cumming explains.
It can’t be over-stated that labor and people costs are consistently underestimated, Manfredi says.
“It’s not just the salaries — it’s the management overhead, compliance work, and training,” Manfredi says. “AI is a good example: while 60% of organizations use AI for IT automation, many fail to calculate the cost of governance or data privacy reviews. Another overlooked area is shared infrastructure costs, such as energy or cooling, which don’t always get properly attributed.”
Other hidden costs can include employee productivity losses during transitions, costs of change management, licensing escalations, and broader downtime impacts, explains Chris McMasters, CIO at the City of Corona, CA.
“There’s another hidden factor that might cause concern, which is the rise of ‘shadow IT,’ or workers bringing in unsanctioned apps that spike support requirements and compliance risks. These line items on a budget don’t always appear, but they have massive TCO implications,” Bibeau explains.
Don’t forget about downtime
Perhaps the most prominent cost blind spot is with downtime, Bibeau says. An hour of downtime for a 50-person company can eat thousands of dollars in lost revenue, but it almost never gets factored into TCO.
“Staff productivity loss and downtime all too often go unseen,” Nibeau explains “A sluggish system may not appear costly on paper, but if every worker loses just 15 minutes a day, that’s hundreds of hours a year. I would also add compliance sanctions, data breaches and shadow IT to the ‘invisible but costly’ category.”
Some overlooked elements of a total cost of ownership calculation may not be hidden, but they’re also not always obvious.
They include “things like cybersecurity insurance increases due to the technology – or the continued use of legacy technology – regulatory compliance, vendor exit fees, performance monitoring tools to surface gains or losses, and sustainability initiatives, such as e-waste disposal or carbon reduction measures,” McMasters explains.
Other less obvious elements of IT TCO include things like user training, lost productivity during transitions, integration complexity, cybersecurity, compliance and eventual decommissioning costs. These are easy to overlook, but can make a big impact over time.
Two that stand out for Manfredi: First, compliance. Failing to meet data residency, privacy, or cybersecurity requirements can add big costs down the line. Second, sustainability. Moving workloads to renewable-powered data centers or reducing energy waste may not lower costs immediately, but it increasingly drives competitive advantage.
How to make more accurate TCO projections
To undertake the most complete TCO effort possible, IT leaders should think long and hard about every aspect of their departments in terms of hardware, software, compliance, legal, staffing and other factors – not just for running systems, but also the impact of services lost, and how they contribute to business gains or losses.
For example, is disaster recovery readiness built into systems? If not, what is the potential impact? Cloud infrastructure can fail. What happens when it does, and what is the impact to the organization? What about interoperability and integration costs when you update the main platform integrations break? And what is the potential impact of policy or legislative changes? Those are frequently missed and can change technology priorities or requirements.
IT leaders should understand that employee training and change management are nearly always underestimated. Energy costs, cooling and disposing old equipment all get overlooked but can add up quickly.
“Pay attention to lifecycle costs such as system retirement and replacement over time—avoid the trap of false economies and one-time spend,” Cumming says. “In today’s integrated fast-moving world, IT investments should always be treated as both continuous cost and continuous value over time.”
Small, fragmented software licenses are often forgotten and can add up to a significant portion of the total software budget, Manfredi explains. With technologies like AI, the cultural shift is as big as the technical one, and ignoring it makes TCO projections unrealistic. It’s crucial for IT leaders to gain full visibility into all their expenditures to truly optimize spend.
Finally, it is important that IT leaders understand that accurate IT TCO requires the ability to see the full picture – capturing both costs and – most importantly – value.
“When organizations account for the hidden and indirect factors, they make smarter technology decisions that drive long-term business success,” Cumming says. “In the fast-moving world of AI, managing IT costs can be a strategic enabler, allowing IT organizations to invest in new capabilities and new approaches alongside critical business deliverables.”
