Understanding how to calculate the total cost of ownership of assets is a must for today’s facilities professionals.
By Jason Henninger
Total cost of ownership (TCO) is a common term in facilities management, and on the surface, it seems straight-forward enough. But sometimes even a common concept can come with a variety of ways to define or perceive it, and confusion ensues. Referring to the total cost of owning an asset, it can, in one sense, mean the general cost of maintenance, or more broadly, every expense from design and sourcing to disposal or demolition. This may be where the confusion comes in.
“Our industry is full of smart people,” said Cameron Christensen, CEFP, FMP, MBA, Associate Vice President for Facilities at The Juilliard School and author of “Building Total Enterprise Asset Management Solutions.” “I don't think they are getting hung up on the term. By itself, it is very basic in definition: the sum of costs to own and operate a facility. The definition from APPA 1000, the Nation’s first standard on TCO, is ‘A holistic approach to maximizing return on investment of managed physical assets that includes the summation of all known and estimated costs to include first, recurring, renewal/replacement and end-of-useful life costs revised at critical decision points to aid in life-cycle asset management decisions.’ Where I think people aren't clear is how that is calculated. There are varying methods.”
Too Narrow or Too Wide
“Many times, people look at total cost of ownership in a narrower lens, what we would call life cycle costing, which ignores the cost of getting the asset or disposing of it, and simply focuses on the stuff in the middle,” said Allen Randolph, VP of Business Development at Kaivac, Inc., and Chair of the Thought Leadership Committee at ConnexFM.
Conversely, Christensen said, some managers may go the other direction and over-stuff the TCO. “I have seen a trend to include not just the total cost to own and operate a facility but also include the activities within the facility. While that has merit for some, I think it skews the equation. Some activities that have nothing to do with the built environment are simply more expensive than others. By boiling the equation down to the common denominator of the cost to operate the facility, and not what goes on inside, is, I feel, the best way to benchmark against our peers and get to a real comparative metric.”
As TCO is meant to assess the total lifespan of an asset, it has both retrospective and predictive qualities, Randolph explained. He noted that it can predict capital needs for the future while managing current spend. It can be used to look back at expenses accrued in a past year as a metric for budgeting for the next by taking not just the big picture but the biggest picture into account. It is ultimately a means of determining good business decisions, for the short and long term.
TCO decisions are investment decisions, as the aim is to invest in the asset with the goal of keeping that asset running in as close to like-new condition as possible. Does the asset live up to its purpose? Do the maintenance costs and depreciation overwhelm the profitability? Determining TCO can assist in answering these questions, providing a framework encouraging facilities managers to make good decisions throughout the asset’s lifetime. “I believe that most of us will agree that there is never enough budget for the needs,” Christensen said. “This is why we prioritize based on criticality. But how can we do that without an understanding of the needs? Asset management and TCO are learning tools as much as they are analytical tools.”
“The predictive aspect of TCO considerations is particularly helpful in budgeting for multiple locations,” Randolph said. When an asset is acquired, there is an expected continuum of how the asset is expected to perform, but the assumptions are not always correct. For example, if a piece of equipment was expected to last decades, but fell apart in a few years, this updated adjustment to TCO can be crucial information for budgeting any other locations with similar equipment. “Often, you will find things that were once thought of as good practice are no longer necessary and vice versa,” Christensen added.
Setting a Standard
Because TCO is such a common term, with multiple applications, a need arose to establish standard definitions, a common framework for facility managers and their colleagues in other roles, to facilitate continuous and clear discussion on a peer-to-peer level. “Most facilities operations have lead-lined, concrete silos separating asset management, planning, design, construction/operations and maintenance,” Christensen said. “A fully implemented and integrated TCO strategy, by necessity, breaks down those silos and gets these groups talking. The data is nice to have but the real power of TCO is the communication it fosters.”
Published standards on TCO were released by the APPA, a few years ago, with Christensen being part of the development team. The TCO standard titled APPA TCO Full Standard-Parts 1 and 2 is available at the APPA bookstore, along with many related publications.
For Christensen, TCO is not only a holistic way of looking at expense, but also a means to grow through communication. “The best resource we have as an industry is our ability to talk about these things and keep coming up with good ideas,” he said. “We are not done evolving. How does TCO impact long-range planning? How do the recent developments and accelerations in technology change the TCO equation? Are there new considerations that we should incorporate into our TCO thinking? These things and more only develop if we are talking about them. By challenging the status quo continually and being willing to evolve with the needs of our communities, we will be better positioned to serve them more effectively and efficiently.”