Cost Of Ownership

According to Wikipedia, Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.

For manufacturing, TCO is typically compared with doing business overseas, going beyond the initial manufacturing cycle time and cost to make parts. TCO includes a variety of cost of doing business items, for example, ship and re-ship, and opportunity costs, while it also considers incentives developed for an alternative approach. Incentives and other variables include tax credits, common language, expedited delivery, and customer-oriented supplier visits.

A TCO analysis includes total cost of acquisition and operating costs as well costs related to replacement or upgrades at the end of the life cycle. A TCO analysis is used to gauge the viability of any capital investment. An enterprise may use it as a product/process comparison tool. It is also used by credit markets and financing agencies. TCO directly relates to an enterprise’s asset and/or related systems total costs across all projects and processes, thus giving a picture of the profitability over time.

Typically, a procurement professional would use the TCO concept to get a cradle to grave total cost of various solutions. In doing so, one could compare total costs where the individual cost factors are different. A perfect example of this is comparing multi-function printer (MFP) bids. Let’s look at three different proposals assuming that all bidders are quoting on the same features and capacities, and your company averages 200,000 prints or copies per month:

The formula to calculate the TCO is:

AC + FS*60 + VS*200,000*60 + VT*200,000*60

As you can see, even though Supplier A had the highest acquisition cost (AC), their bid resulted in the lowest 5-year Total Cost of Ownership. Please note that this is a simplistic calculation for demonstration purposes and excludes some other factors such as depreciation and internal rate of return.

Why should you consider doing a TCO analysis for Statistical Programming services? You want to obtain a quality service and pay a fair price for your clinical programming, yet, you do not know if you should do the work yourself or contract with a qualified functional service provider to do the work for you. You could look at this as a make or buy decision, but, utilizing the TCO concept can shed some light on some non-typical cost factors. Below are some factors that you should know for your own company to make an informed TCO analysis for your decision.

Salary of experienced Statistical Programmer
Cost of legally required benefits (Social Security, Medicare, workers compensation)
Cost of insurance benefits
Cost of sick and personal time — assume ten days per year
Cost of vacation time — assume 15 days per year
Cost of holidays — assume 12 paid holidays per year
Cost of two 15 minute breaks per day
Cost of retirement plan — assume of 3% contribution (50% of the first 6%) and a 0.25% administrative fee
Cost of real estate — you have to provide space for your employees and assume an 8’ x 8’ cube with an additional 50% for common areas
Cost of technology — you must provide your people with equipment (PCs, printers, software, landline, mobile phone, etc.) and a network infrastructure
Cost of recruitment — you do need to recruit your people and assume a turnover rate of every two years
Cost of training — assume one week of training per year
Cost of retention — it’s expensive to replace people so you must offer incentives to keep the good ones
Other factors to consider depending upon the company could include cost of parking, tuition or CE credit reimbursement, gym membership, commuting allowance

An example of these costs using data gathered from the BLS and other on-line resources would be:

Cost of Ownership

Thus, a programmer with a salary of $100,000 per year would, in essence, cost the company $210,017 or $101.00 per hour based on 2,080 hours per year. This assumes that you need to back-fill for all of the time off. This is not the norm, thus, if you were to back out the Time Off Benefits of $22,403 you would have a cost of $187,614 and based on the 1,614 hours of work time (2,080 minus the 466 hours of Time Off Benefits) this yields an hourly rate of $116.24.

As you can see, the largest and most variable costs are those of Recruit/Retain and Management. Various studies have shown that the Recruit/Retain cost alone can be as high as 50–60% of the employee’s annual salary. However, the total cost of turnover can reach as high as 90–200% of the employee’s annual salary.[1] These costs include candidate interviews, new hire training, the recruiter’s salary, separation processing, job errors, lost sales, reduced morale and some other expenses to the organization. If this figure were to be 100% the Recruit/Retain number in the above example would be $50,000 ($100,000 every two years) instead of the $30,000 shown in raising the effective hourly rate to $128.63.

You would need to do your analysis to see if these numbers make sense for your organization.

One of the overriding positive factors to using a service provider instead of your employees is the flexibility to add and remove staffing as business needs change. It is extremely tough to quantify this benefit, but, it is one you should consider. What would happen to your effective hourly wage should you have a Recruit/Retain timeframe of six months instead of the two years as shown above? You can do the math yourself, and you would be surprised to see the result.

TCO is a powerful tool, and if utilized as above, opens your eyes to the myriad of costs related to your true cost of internal labor.