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Total Cost of Ownership (TCO) and the finance decision

14 November 2016

The big picture includes the total cost of a solution, above and beyond the thing itself— services, maintenance contracts, and all those extra pieces that turn the piece of equipment from a dumb box into a smart, connected machine. It also includes understanding the opportunity cost.  

Will this machine replace a less efficient machine? What happens to my business if I don’t have this equipment? And if I do have it, what other costs are involved with running it?

When considering adding assets, leading CFOs say TCO—total cost of ownership—is clearly part of the transaction’s bottom line. Forecasting everything, right down to the bank conveyance, they pretty much know all the costs for the asset. They know the cost to staff it. They know the cost to maintain it, etc. They’re forecasting the full P&L, all capital investments they make.
 
Lindsay Kraycar, a Senior Regional VP with Somerset Capital, provides an example of how TCO can influence equipment decisions: “A good finance officer will look at two trucks that are five years old, and will say, ‘Our maintenance costs last year on these trucks was $10,000, and we were averaging 4.5 miles a gallon. If we get a new truck, the warranty will cover the maintenance costs. Therefore, those costs will go away, and we’ll have a payment of $1,900, but we’ll also get 7 miles a gallon versus 4.5 miles a gallon.’” 
  
These days, maintenance costs are just as likely to include software upgrades as they are to include oil changes. When a company is installing a million dollars of laptops, that’s great. But understanding the software needs, maintenance and help desk support system just begin to round out the TCO.

Technology is changing the face of financing decisions, especially with things like copiers, information technology, or medical equipment as software and services are becoming a bigger part of the deals. But there is more software and services within all kinds of equipment. There are the diagnostics that you use to measure performance of your trucks and trailers. There are telemetric devices that you put in your fleets of cars. Even for something as basic as machine tools and printing presses, you are finding front-end systems that run them. People aren’t just standing at the machine and cranking things out anymore. They run it via a control network.
 
As a result, smart lessors now have the ability to bundle all of those things into a transaction and offer our customers a seamless product, with leasing and servicing all on the same invoice. Equipment-driven lessors offer an even easier solution as their depth of equipment knowledge makes the “bundling” of TCO an easier process.
 
For more than 30 years, the Somerset family of companies has redefined equipment finance. We take our clients further by providing services around the financing of equipment for mid-sized and large companies throughout the Americas, Asia and Europe and offer finance solutions that can help you meet your dynamic equipment needs. We help you think bigger and go beyond finance. Let’s talk.


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