“For want of a nail, the shoe was lost.
For want of a shoe, the horse was lost.
For want of a horse, the rider was lost.
For want of a rider, the war was lost.”
Here's how a professor would introduce you to the concept of Total Cost of Ownership in an accounting class.
Total Cost of Ownership, or TCO for short, is a concept that helps you understand the complete cost of owning something over its entire life. You know how when you buy something, like a car, the initial price you pay is just the beginning? Well, TCO takes into account all the expenses you'll face after that, like maintenance, insurance, fuel, taxes, and even the potential resale value.
So, it's not just about how much you pay upfront, but also about considering all the costs you'll encounter over time. This can be really useful when you're comparing different options, because sometimes a cheaper item might end up costing more in the long run due to higher operating or maintenance expenses.
For example, let's say you're trying to decide between purchasing two cars. One is cheaper upfront but has higher fuel costs and requires more frequent maintenance, while the other has a higher initial price but is more fuel-efficient and needs less maintenance. Comparing their TCOs can help you make a smarter decision, as it'll give you a clearer picture of which one will actually be more cost-effective over the years.
Now, there isn't a one-size-fits-all formula for TCO, as it can vary depending on the specific item or decision being evaluated. However, there is a general framework you can follow to calculate TCO:
TCO = Initial Costs + Recurring Costs + Intangible Costs – Residual Value
Initial Costs: These are the upfront expenses associated with purchasing or acquiring the item, such as the purchase price, setup, and installation fees.
Recurring Costs: These are the ongoing expenses of owning and using the item over its useful life. They can include maintenance, repairs, operating costs (like energy or fuel), consumables, software updates, or subscription fees.
Intangible Costs: These are less quantifiable costs that might be associated with the item, such as lost productivity, opportunity costs, or negative impacts on health, comfort, or quality of life. These costs can be difficult to measure, but they're important to consider when evaluating TCO.
Residual Value: This is the estimated value of the item at the end of its useful life. It could be the resale value or the salvage value if the item is sold, repurposed, or recycled. Subtracting the residual value from the TCO gives a more accurate picture of the net cost over the item's life.
Oh, and keep in mind that some of these components may not apply to every situation or decision, so you'll need to adjust the formula based on the specific factors relevant to your analysis. Also, it's important to consider the time value of money, as costs incurred in the future may be worth less than costs incurred today. You can do this by discounting future costs using a discount rate or incorporating inflation adjustments, depending on the complexity of your analysis.
So far, so academic, and oh so boring!
In fact, the way TCO is described on most sources on the internet is usually quite dense; it is presented within quite a rich and complex financial context, along with hefty financial terminology thrown in.
And if there's one thing that you wish to take away from this piece, besides TCO of course, it is this:
Sometimes, favouring relatability over precision in your choice of vocabulary and examples might help generalise the principle or concept to far more contexts than the one it is originally developed for.
What generalises better, sticks better.
And what sticks better, gets applied more often.
When students encounter jargon, they isolate whatever they're learning to the subject they're learning. And in worse cases, if they don't understand the usefulness of a concept, they might even bracket it to just the scope of the semester or even the lecture they are attending.
I'm now reminded of a chapter in the book Literary Machines, that I now feel compelled to share, at the expense of the subject of this essay.
But hey, thought is tangential, and so is my writing! So, please forgive me this brief departure from the topic of TCO to share with you some excerpts from the book that really tell you what's wrong with structured education.
THE SCHOOL PROBLEM
Most people consider school to be a grim necessity to be accepted, endured and survived. School, as nearly everyone freely admits, is dull, unpleasant, and designed to build mediocrity. It is a mapping of the world of ideas into a sequential bureaucratic presentational system, with generally awful results.
1. The Curriculum
The very system of curriculum, where the world's subiects are hacked to fit a schedule of time-slots, at once transforms the world of ideas into a schedule. (“Curriculum” means “little racetrack” in Latin.)
A curriculum promotes a false simplification of any subject, cutting the subject's many interconnections and leaving a skeleton of sequence which is only a caricature of its richness and intrinsic fascination.
2. Teacher as Feudal Lord
The world of ideas is carved into territories, and assigned as fiefdoms to individuals who represent these territories (called Subjects); these lords and ladies, in turn, impose their own style and personality on them. The pupil must pay homage to the Duchess of History, the Count of Mathematics; and if you and these individuals do not like each other, you will almost surely dislike the subjects they control, which take on their stamp and personality. Each feudal lord has absolute power to bore, offend, and sever access.
The teacher controls access to the subiect under his or her own viewpoint. If you find this viewpoint unfriendly, unpleasant or confusing, that subject becomes closed to you forever.
These two principles — the crushing of living subjects into curricular caricatures, and their bestowal to feudal overlords — effectively guarantee that whatever is taken in school becomes and remains uninteresting. Everything is intrinsically interesting, but is drained of its interest by these processes.
Thus follow both the dreariness of education and the crippling of the mind as we see it everywhere today. Education is typically the process of successively ruining subjects for you, and the last subject to be ruined determines your profession. An educated person is someone who says, "I don't know anything about that, I never took it." Whereas a free-minded person can become excited about a new idea, in any subject, whether or not he or she ever heard about the idea or the subject before.
What is perhaps even worse, this system imbues in everyone the attitude that the world is divided into "subjects;" that these subjects are well-defined and well-understood; and that there are “basics,” that is, a hierarchy of understandings which must necessarily underpin a further hierarchy of “advanced ideas,” which are to be learned afterward. (emphasis added)
This outlook could not have been better designed to crush people's mental spirits, to keep them from becoming involved with ideas, from thinking, exploring, conjecturing, taking interest.
— Theodore Nelson, Literary Machines
So, as a teacher, if I had to make sure that the concept of Total Cost of Ownership really stuck with you — as it ought to, considering it is a principle that is fundamental to more things than just business finance — I will have to ensure that I explain it to you in a way that helps you see it in the world around you.
So, I'll try doing so with some examples that you may find more relatable.
In the last two years, there has been a huge influx of people moving to Bengaluru. As far as my knowledge goes, these are folks usually working at the budding startups in the city.
And what I usually find is that these people get attracted by what I call the Holy Trifecta of the Bengaluru Startup Tech Bro archetype:
It's as if the city of Bengaluru has no other place to rent a house in besides these three locations. It's no surprise then that properties in all these three areas have seen a massive inflation in rent this year, some approaching a 40%–50% hike!
In my mind, it's a simple opportunity cost calculation for the landlord.
“If I didn't have this tenant, what would a new tenant moving in be willing to pay?”
Can't blame a capitalist for capitalizing, now, can we?
Let's consider the example of one Shreya who has recently moved to Bengaluru and, like others, has been taken over by the Holy Trifecta hype. Shreya's office is located in J.P. Nagar, but she finds an attractive penthouse in Indiranagar which she then proceeds to share with two other roommates. Indiranagar promises posh night clubs, fancy eateries, and let's Shreya optimize for life in the work-life balance equation. At first glance, Indiranagar does seem like the most happening place to be in.
But soon enough, Shreya starts realizing the long-term costs associated with the longer commute from Indiranagar to J.P. Nagar.
She now has to spend a lot of money on transportation, let alone the anxiety of getting an Uber during peak hours every working day.
Thinking that she'll ease things out for her by buying a two-wheeler, she gets a second-hand Activa. Now she is paying for fuel, public transportation, or wear and tear on the Activa. Combined with maintenance costs and the hassle involved with the second-hand bike breaking down mid-journey multiple times in a quarter, Shreya is now realizing both the monetary and psychological costs of having a longer commute.
But that isn't all. You can now find her cribbing about Bengaluru traffic daily on Twitter. The extra hours she spends commuting each day could've been used for other activities, like pursuing hobbies, spending time with her friends, or working on side projects.
Also, a 45-minute to an hour long one-way commute to the office every day means that she's exhausted by the time she reaches the office. The same energy spent going back home means she has now no motivation to do household chores or cook her own food.
So, she develops a habit of ordering food on Swiggy every day. This, once again, adds up to the total cost of ownership of having a flat in Indiranagar, ~10 km from the office.
She doesn't even have enough motivation to use the expensive Masterclass subscription she paid for, so even that money goes down the drain while slowing down the rate at which she upskills herself. Keep in mind that even though no accountant would've considered a wasted Masterclass membership as contributing to the total cost of ownership, it really does!
Over time, the costs of having a short commute to the office far outweigh the benefits of living in fancy Indiranagar.
After considering these long-term costs, Shreya might realize that living somewhere within walking distance of her office, despite the slightly lower quality of life or infrastructure, is actually a better overall choice. By focusing on the short-term benefit of living in a posh location, Shreya made a decision that had many implicit and hidden costs of ownership in the long run.
And this trap is nothing new, considering the typical Indian middle-class household.
Our short-term mindsets generally make us go for the cheaper option over the higher quality but more expensive one.
Let's say a family needs to purchase a new washing machine. They're considering two options: a less expensive, traditional top-loading machine (Washer A) and a more expensive, energy-efficient front-loading machine (Washer B).
At first glance, it might seem that Washer A is the better choice because of its lower upfront cost. However, the family doesn't take into account the long-term costs associated with each option.
Washer B is more energy-efficient, which means it uses less electricity to operate. Over time, the family would save money on their electric bills, which could offset the higher initial cost of Washer B.
Washer B uses less water per cycle, which would result in lower water bills. The family currently lives in an area with high water rates and seasonal water shortages, so this will undoubtedly end up becoming a significant source of concern and a reason for fights within the household.
Washer B is gentler on clothes, which means less spent on clothing.
Washer B has higher-quality components, leading to fewer breakdowns outside of its warranty period.
Okay, at this point, I'm just making things up, but you get the drift.
While purchasing anything, it's easy to think that what you're shelling out right now is all that you're paying for the product.
A cheap camera strap might cost a thousand bucks less than a more expensive one, but think about the financial loss you'll have to bear when the cheap strap buckle breaks, and so does your camera.
That cheap ladder you got off of Amazon might result in a lifelong injury, the medical bill for which could go in the thousands.
Always consider hidden risk in your cost calculations. Consider the counterfactual. And then decide.
Even though TCO is a concept usually restricted to business finance, you can easily generalize it to other areas of your life and reap massive benefits over time in your decision-making.
For want of a cheaper nail, don't lose sight of the war.