Security Systems and TCO: Calculating Total Cost of Ownership
Updated: Jun 20
In this second in a series of articles focused on Total Cost of Ownership, we look at how to calculate Total Cost of Ownership, including the quantifiable and not-so-quantifiable cost factors.
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 up front can minimise the potential for financial and reputational fallout down the track.
In this article we look at the ‘hard’ dollar costs of TCO and we also 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’. 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 works, the Acquisition vs Operating Cost proportions can look very different. In the following example of Solution A and Solution B, we see how divergent Operational Costs can result in a TCOs that compare very differently to their respective initial (acquisition) costs:
The ‘Soft’ Costs
In addition to the hard costs there exist a host of other potential costs that are by their nature difficult to account for. These are the so-called ‘soft’ operating costs associated with system repair, downtime and failure, unanticipated inefficiencies, and early obsolescence, which are the downstream consequences of poor product selection, substandard maintenance, inadequate asset management practices, and neglect.
It’s a little ironic, as ‘soft costs’ is something of a misnomer – the more critical security is to your organisation, the more vulnerable it is to soft costs. Despite being incredibly difficult to quantify, they can pose significant financial and disruption downsides to an organisation.
Examples of soft costs generally include the potential costs incurred as a consequence of system downtime/failure, such as lost productivity, additional personnel costs (such as temporary security guarding), and business disruption. Other hidden costs may include damage to staff morale, administrative – and potentially litigation – costs stemming from contractual or performance issues.
While they’re difficult to quantify, the risk of incurring potential soft costs can be mitigated. Adhering to robust solution selection and procurement practices, working with reputable security partners and suppliers of quality components and solutions, strong supply chain and asset management, and proactive maintenance practices can all play a role in minimising potential soft costs.
“When calculating TCO, it’s imperative that you account not only for the anticipated hard costs but also for the extent to which a solution exposes your organisation to potential soft costs,” says Mark Lloyd. “This is essentially an exercise in downstream risk management.”
The following is our shortlist of ‘soft’ cost factors placed into corresponding categories:
The cost factor category in the above table that you may have been surprised to see is Opportunity Costs. In terms of a security system solution, opportunity cost is the unrealised value you would have derived from an alternative security solution if you hadn’t selected the one you did. It’s what you missed out on in order to get what you got.
According to UCLA Associate Professor of Marketing and Behavioural Decision-Making Stephen Spiller, “consumers should incorporate opportunity costs into every decision they make, yet behavioural research suggests that consumers consider them rarely, if at all.” Economists refer to this as ‘opportunity cost neglect’.
Opportunity cost neglect is essentially the act of making a bad purchase choice as a result of failing to consider the alternatives – a big (and often cited) procurement risk. The obvious mitigation to this risk is to ensure your procurement team actively considers multiple distinct alternative solutions (including their TCOs) as part of its approach to market.
“Procurement processes are a golden opportunity to meaningfully survey the range of solutions that are out there,” says Mark Lloyd, “but all too often purchasing decisions are driven by professional biases, conventional wisdom and, quite frankly, a failure to link security system requirements with emerging technology trends, future security needs, and the strategic goals of the organisation beyond security.”
In our third article in this series, we’ll explore the Return on Investment (ROI) factors that can not only mitigate the cost impost of a security solution but also turn it into a business value-add. A high-performing security system that pays its way by preventing loss and harm from security breaches and also achieves business outcomes beyond its primary security remit – and does so while remaining adaptable to new technologies and emerging threats – can deliver significant value to an organisation.
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.