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Investing in Your Security: How to calculate Total Cost of Ownership

Updated: Jul 29

In this second in a series of articles on investing in security systems, we look at how to calculate Total Cost of Ownership, and in particular the costs of acquisition, operation, and disposal.

In our first article in this series, we explored the hard-to-argue-against reasons why taking a TCO approach to calculating the cost of security systems makes good business sense. The case is clear-cut: understanding the downstream costs upfront can minimise the potential for financial and reputational fallout down the track.

In this article, we look at the ‘hard’ dollar costs of TCO (later, we’ll introduce the difficult to quantify but no less critical ‘soft’ costs – the potential costs incurred by an organisation as a consequence of system downtime or failure). Calculating TCO is by no means an exact science, but it’s an important one.

The ‘Hard’ Costs

There are various ways to calculate TCO. Typically, it starts with identifying an appropriate ‘lifespan’, which might be based on either ‘depreciable life’, ‘economic life’ or ‘service life’ of a system and its components. We base our TCO model on service life – the number of years the acquisition will be in service.

The 'hard' whole-of-life cost factor categories include:

1. Acquisition costs: the ‘upfront’ costs, including the costs of going to market, the price of the asset and its components, and the costs of deployment/installation. These tend to be associated with CAPEX [Note that alternative leasing and as-a-Service models significantly reduce up-front costs and pushes these into OPEX for the duration of a contract.]

2. Operating costs: the ‘downstream’ costs, including administration and overheads, service, maintenance. and additional redesign costs. These tend to be associated with OPEX.

3. Disposal costs: the ‘end-of-life’ costs, including decommissioning, disposal, and recycling.

These cost factors are represented in the chart below:

These cost factor categories can be further broken down into specific cost factors. We’ve identified several of these in the following shortlist:

With the exception of Disposal Costs, which according to various sources tend to represent around two percent of TCO, the relative size of these costs can vary considerably.

“According to our research, Acquisition Costs tend to vary from 50 to 70% of TCO, while Operating Costs can range from 30 to 50% of TCO,” explains Optic Security Group’s Managing Director ANZ Mark Lloyd. “However, it’s important to note that these proportions are very much solution-specific; every solution is unique, and the variables many.”

Even when comparing competing solutions put forward to address the same scope of work, the Acquisition vs Operating Cost proportions can look very different. In the example of Solution A and Solution B in the table opposite, we see how divergent Operational Costs can result in TCOs that compare very differently to their respective initial (acquisition) costs.

As a significant investor in security systems, and CCTV in particular, local councils provide obvious case studies into security system costs. And from available evidence, it appears that council spending patterns on CCTV tend to reflect a 30-50% operating cost spend.

In New Zealand, a recent Radio NZ report found that several local councils had collectively spent a total of $29,773,472 over five years on CCTV installations. They had also spent $5,426,065 on running costs in the past 12 months, which over five years would amount to somewhere in the order of $25,000. Wellington City Council, for example, had spent $609,000 on installations over five years and $262,608 in running costs over the past 12 months, and Auckland Transport had spent $10,674,455 and $1,729,816 respectively.

In Australia, it was reported in 2012 that the City of Sydney spent almost $1.7 million annually “just to operate and monitor its network of 87 cameras, 24 hours a day, with maintenance and upgrade costs on top of that.” The Victorian Auditor General’s Office 2018 audit into the Security and Privacy of Surveillance Technologies in Public Places noted that “Councils should understand and consider the whole-of-life costs associated with installing and managing surveillance systems. While the councils could identify these costs, none were regularly tracking and monitoring them.”

In our next article in this series, we’ll explore the ‘soft’ costs of TCO – the potential costs incurred by an organisation as a consequence of system downtime or failure, which are the downstream consequences of poor product selection, substandard maintenance, inadequate asset management practices, and neglect.

In the meantime, if you’d like to find out more about how Optic Security Group can manage your security risks through solutions that tick the TCO box, please get in touch with us.

#totalcostofownership #securityseystems #hardcostversussoftcosts

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