In this first in a series of articles on investing in security systems, we look at why taking a Total Cost of Ownership (or whole of life) approach to calculating the cost of security systems makes good business sense.
When purchasing security systems, whether it’s CCTV, Access Control or Intruder Detection Systems – or an integrated solution – procurement decision-makers in organisations tend naturally to consider the ‘price tag’ or, in other words, the upfront costs. These include the costs of the systems themselves (the hardware and software) and the cost of installation.
At first glance this makes sense. Buyers have budgets, and upfront costs are readily quantifiable. Comparing the upfront costs of different solutions provides buyers with a benchmark against which to consider their potential CAPEX implications.
So far so good. But what about the costs of operating and maintaining the solution throughout the entirety of its service life? Your security system may be with you for five, ten or even fifteen years, and it will require OPEX to operate and maintain over its lifetime.
Various studies have shown that operating costs can ordinarily amount to up to 50% of the Total Cost of Ownership (TCO) of a security system. Failure to take into account these downstream and sometimes ‘hidden’ costs exposes an organisation to infrastructure risk, future performance issues, and the certainty of higher overall costs.
Understanding TCO
Total Cost of Ownership is an estimate of the total costs of goods, services or construction works over the whole of their life – the long-term costs and expenses incurred during the product's useful life and ultimate disposal. Calculating TCO involves identifying the initial purchase price and estimating all future costs and returns.
“Factoring TCO into your procurement decisions is not only the transparent approach, but it also makes very good business sense, and there exists an abundance of research-based evidence that supports this.” explains Optic Security Group’s Managing Director ANZ Mark Lloyd.
To be sure, part of good procurement is achieving the right price – but the initial purchase price is just the tip of the iceberg, particularly so when one considers the downstream costs of managing, maintaining, and servicing security system assets. The item with the lower total cost of ownership is the better value in the long run… even if its upfront price tag is higher.
Take the classic printer scenario for example. Printer A has a cheaper price tag than Printer B, however, lower cost ink cartridges and more efficient ink consumption may result in making Printer B the better value option in the long run. The cut-price solution may be nicer on the bank balance to begin with, but it may end up costing an arm and a leg to maintain.
Public Sector Buyers
In Australia, the Commonwealth Procurement Rules identifies ‘value for money’ as a key component of good procurement. The Rules state that “Price is not the sole factor when assessing value for money,” and that when conducting a procurement, an official must consider the relevant financial and non-financial costs and benefits of each submission including whole-of-life costs.
According to the Rules, whole-of-life costs can include “the initial purchase price of the goods and services; maintenance and operating costs; transition out costs; licensing costs (when applicable); the cost of additional features procured after the initial procurement; consumable costs, including the environmental sustainability of consumables; and decommissioning, remediation, and disposal costs (including waste disposal).”
In New Zealand, the Government Procurement Rules (4th edition) identifies ‘public value’ as a key component of good procurement. According to the Rules, “The principle of public value when procuring goods, services or works does not mean selecting the lowest price but rather the best possible outcome for the total cost of ownership (over the whole-of-life of the goods, services or works.”
According to the Rules, TCO is a combination of “the purchase price and all other expenses and benefits that the agency will incur (eg. installation and training, operating and maintenance costs, repairs, decommissioning, the cost associated with disposal and residual value on disposal.”
Just good sense
While private sector procurement decision-makers are not necessarily bound by such rules, they are otherwise accountable to executives, boards, shareholders, and stakeholders, and to the natural laws of good business sense.
“Seeking transparency on the downstream costs up front is not only sensible,” says Mark Lloyd, “but it can minimise the potential for financial and reputational fallout down the track.”
As Investopedia’s TCO explainer states, “While the total cost of ownership can be overlooked, its analysis is essential in preventing unnecessary future losses that can arise from focusing only on the immediate direct costs of a purchase.”
Gaining transparency over all downstream costs, however, is easier said than done. In the next post in our Investing in Your Security series, we’ll discuss the whole-of-life cost factors that you may wish to consider as part of your TCO calculation.
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.