Imagine you are responsible for a safe city project, and you are tasked with deploying a multimillion-dollar video surveillance system. Where would you start? How would you evaluate tenders? How would you assess upfront costs in relation to the long-term operating costs? And which areas of the system should you focus on to optimise its total lifecycle cost? These are just some of the questions you need to ask to minimise risk and avoid unpleasant surprises once the system is deployed.
This total cost of ownership (TCO) study presents a comprehensive picture of the total cost for a large hypothetical surveillance system in a major city. It shows how costs are divided between different parts of the system, as well as the different phases over the ten-year lifecycle of the system. It also includes an analysis of certain factors that sit outside the TCO, such as business costs due to system downtime. Finally, this model shows how camera technology and product reliability could impact the total cost of ownership in a significant way.
Definition of TCO
TCO is a financial estimate model that intends to capture all the costs associated with an activity over its complete lifecycle. TCOs are used in many industries as a tool to correctly estimate the direct and indirect costs of deploying a system, and as a tool to compare different systems with different characteristics and cost distribution.
In a fact sheet from 2009, Accenture defines total cost of ownership as “defining the range of costs associated with the asset lifecycle including research, development, procurement, operation, logistical support and disposal of an asset.”
Purpose of a TCO – how can it be used?
A TCO, when included in any financial analysis, provides a cost basis for determining the total economic value of an investment and as a product/process comparison tool. A TCO can:
- help project teams understand how the cost is distributed over time, from installation to operation and decommissioning
- help to understand the distribution of costs between different system components
- minimise the risk of unforeseen costs that can erode budgets
- help to focus efforts and reduce costs over time
- help during discussions with stakeholders about long-term perspective and lifetime expectancy of a system
- be a contributing factor, out of many, when evaluating project tenders
Methodology and Considerations
Every TCO is unique. It is important to point out that there is no single uniform TCO model that fits every project. On the contrary, every project has a unique cost distribution, and it is up to each project team to determine which cost factors to take into account and how to judge the monetary aspect of each factor.
Even though many of the cost factors presented here are common in surveillance projects across different industries, there are many that will be different. For example, in an airport or critical infrastructure installation, the consequences of system downtime are vastly different from a school district. Another example is the lifespan: in some industries, such as city surveillance, a system could be expected to remain in place unchanged for years, while in others, such as a retail environment, cameras may be moved around and the system upgraded on a regular basis.
Who carries the cost?
This TCO model captures and assesses a number of system costs that occur during acquisition, as well as over time, in a hypothetical city surveillance project. However, this analysis does not define who actually has to carry the cost in the end. In some projects, it might be the end customer that pays for everything, while in other projects the system integrator will carry the cost for some areas. Naturally, it will also depend on the warranty agreements, service level agreements, financing and so on.
Developing the TCO
To develop this model TCO, the following steps have been taken:
- determining the cost factors
- defining an example system
- analysis of the results
Data sources and research
This TCO information is based on data gathered from a number of sources to determine cost factors and reasonable values to enter into the system. Sources for this project include:
- interviews with system integrators
- interviews with end customers
- data from Axis using existing similar projects
- knowledge, experience and statistics from Axis support, sales and field engineering organisations
- data available from security industry organisations and other security sources
The data gathering and development of the model took place during 2015, which means factors such as equipment prices, labour and maintenance costs represent a snapshot of the market situation during that period of time.
Determining the Cost Factors
The lifecycle phases of a surveillance system
To create a simple overview of all the costs that affect the TCO of a video surveillance solution, the cost factors have been categorised according to the activities and the chronological order in which they appear throughout the system lifecycle. The ownership of a product can be divided into three phases: acquisition, operation and decommissioning. Following these phases, the costs are then divided into three main categories: total cost of acquisition, total operating cost and total decommissioning cost. The costs in each of the main categories vary in nature. While the acquisition costs and the decommissioning costs only occur once, the operating costs occur continuously throughout the system lifecycle. The size of the operating cost is then heavily dependent on the expected length of the system service time.
Factors covered in this TCO
As stated above, some direct costs as well as some indirect costs are obvious when purchasing a surveillance system. For example:
- hardware investment
- software investment
- costs for warranties
- installation and integration cost
- user education
However, these are only a few of the costs that can be incurred during a system’s lifecycle. In this TCO, a total of 40 cost factors have been taken into account, including project management, operation, maintenance, decommissioning and much more.
Examples of factors not covered in this TCO
There are a number of factors that could have been included in the TCO model, but were omitted. One reason for not including these costs is that estimates vary considerably between industries. This could skew the TCO in the wrong way. For example, the costs for alarm failures and costs incurred in the business operation due to system downtime will have very different consequences for a headmaster in a school compared to the security manager at a nuclear power plant.
There are other costs that have been excluded from the TCO because they are potentially so huge that they dwarf the overall system cost – for example, salary costs for staff that operate a monitoring centre, or the cost of a climate-controlled server room for storage.
Examples of costs not included in this TCO are:
- extended warranty
- system inspection
- server room
- software failure
- alarm failure
- business costs as a consequence of system downtime
- staff costs in operations centre
The latter two will, however, be explored in separate sections later in this article.
Defining an Example Project
The example project in this TCO model is a large-scale city surveillance project in a mature market. The project includes 1,500 outdoor cameras and an enterprise-class video management, network and storage solution.
Attaching values to each factor
Values/costs have been defined for all factors based on the extensive input as described in an earlier section. Examples include:
- prices for all products are manufactured suggested retail prices (MSRP) without any discounts
- 13 labour roles are defined, ranging from an administrator to a senior consultant
- labour costs range from USD 35 (AUD 47) to USD 200 (AUD 271) per hour depending on role
- electricity cost is USD 0.13 (AUD 0.18) per kWh
- cable installation time is estimated at four hours per camera
- camera installation time is estimated at two hours per camera
- camera maintenance is estimated to happen twice a year
Analysis of the Results
Total cost of ownership for the city surveillance project
The analysis of the TCO in this section focuses on the relative distribution of cost in percentages and less on the actual dollars and cents. But to create an understanding of the magnitude of this system, the first conclusion is that the total cost of ownership for this 1,500-camera system over a ten-year period amounts to approximately USD 17,000,000 (AUD 23,035,543).
Cost per system phase
See Figure 1 for the percentage of cost split during the lifecycle of the system. The cost per system phase amounts to:
- total acquisition cost: USD $11,400,000 (AUD 15,447,364), or around 67 percent
- total operating cost: USD 5,200,000 (AUD 7,046,166), or around 31 percent
- total decommissioning cost: USD 300,000 (AUD 406,510), or around two percent
Figure 1. Share of costs during the lifecycle
Costs for products vs. other costs
Another top view of the TCO is the division between product costs and other costs. In this TCO, as shown in Figure 2, about half (49 percent) of the total costs relate to direct upfront costs for the purchase of cameras, software and other equipment – also referred to as contract costs. The other 51 percent are costs relating to design, installation, maintenance and so on.
Figure 2. Contract costs compared to other costs
Detailed costs per area
Looking closer at the TCO, Figure 3 and Figure 4 presents two different views of the detailed distribution of costs during the lifecycle.
As stated above, almost half the TCO is made up by the initial product investment, also referred to as contract cost. Around two thirds of that contract cost, or 34 percent of the whole TCO, is for video management software, network, storage and hardware other than cameras. A third of the contract costs is camera cost, making up around 16 percent of the TCO for the system.
The other costs that occur during ‘year zero’ of the system in this model are pre-contract and deployment costs. Pre-contract costs include, among other things, system design and vendor evaluation. Deployment costs cover everything connected to installation, configuration and integration. Together, pre-contract and deployment costs account for around 18 percent of the TCO.
During operation of the surveillance system, a number of costs are incurred, the main one being system maintenance. This covers all planned and regular maintenance (for example, cleaning) of cameras, servers, software and so on. Operation also includes costs due to system failure as well as software licence fees and power consumption. Maintenance costs represent the single largest share of the TCO for this system, amounting to around 20 percent of the TCO. Other operating costs add up to approximately 12 percent.
The decommissioning of a surveillance system is very important and is often overlooked in the initial costing stage of a project. From a sustainability perspective, it is essential to properly dismount and recycle equipment at the end of its lifetime, and these costs must be factored into the system’s lifecycle. In this TCO model, the decommissioning costs represent 2 percent of the total cost.
Figure 3. Cost distribution of the TCO in percentages
Figure 4: The cost distribution of the TCO in money (USD)
Observations on costs not included in the TCO
Security costs due to system downtime
When compiling this TCO model, security costs that appear from the downtime of a failed surveillance system were excluded. However, when it comes to protection of valuable corporate assets, the costs of a security breach can of course be catastrophic, especially if confidential business information or other intellectual property is destroyed, stolen or made available to competitors.
Business costs due to system downtime
Unplanned events that cause a system to fail can lead to excess costs for a business. For example, in an airport, if the surveillance system fails, it could lead to very high costs as extra security guards may need to be dispatched, or flights might be delayed. In a retail store, a failed surveillance system may impact the ability to prosecute perpetrators for fraud and shrinkage, leading to substantial losses. In some city surveillance situations, camera maintenance crews need to be accompanied by police or guards when going out on site, which would increase the downtime costs substantially.
In the TCO, when operating costs are calculated, business downtime costs have been excluded. However, the TCO model makes it possible to make an estimate and see how business downtime costs could impact the TCO. For example, assume that it is necessary to dispatch one security guard to protect the installer as he goes to a camera location to fix a problem or replace the camera. Adding the security guard cost – only labour in this case – increases the share of the operating cost from 31 percent in Figure 1 to 33 percent, as you can see in Figure 5.
Figure 5. Share of costs during the lifecycle when an example of business downtime is added
Labour costs in the operations centre
When calculating the operating costs of the TCO, the labour cost of the staff needed to man the operations centre during the ten-year system lifespan has been excluded. However, the TCO model makes it possible to estimate this cost and factor it in to see how it impacts the TCO.
In an enterprise city surveillance installation, it is likely to have operators active 24 hours a day, 7 days a week. Assuming that five people are constantly present in the room, it is possible to make a rough calculation on the cost distribution. As can be seen in Figure 6, the total operating cost now jumps from 31 percent to 73 percent of the TCO, almost triple the acquisition cost. This is in line with the findings in the TCO studies from other industries.
Figure 6. Share of costs during the lifecycle when staff for the operations centre is taken into account
A Closer Look at Product Quality
Maintenance and repair costs play a significant part of any TCO. The importance of product reliability is often underestimated when considering the cost of maintaining and operating a system. High product quality is of course one critical aspect to keeping maintenance and repair costs to a minimum.
The TCO presented so far is built on typical failure and maintenance frequency, as captured by support statistics.
Figure 7. The TCO with an increased product failure rate
This paper presents the results from a comprehensive TCO study conducted in 2015 by Axis Communications, resulting in a model with 40 costs relating to different system components and stages.
The model was populated with a large-scale 1,500 camera city surveillance project, with data taken from internal Axis sources as well as interviews and comparative surveillance industry information. The TCO is based on current equipment, labour and maintenance prices sourced during 2015, so market situation and costs may differ at time of reading. The result showed among other things that about 50 percent of the total cost is made up of investments in hardware and software, and 50 percent are in installation, maintenance, operating and decommissioning.
To highlight the importance of product reliability, the TCO was used to simulate a scenario where product failure would increase by a factor of four. This resulted in the additional costs making a huge negative impact on the TCO, increasing the failure cost from 5 percent to 13 percent of the total cost.
A TCO like the one presented here can be a useful tool when calculating project costs or assessing tenders. It presents examples of costs which can be expected during a system’s lifecycle, and indicates areas to focus on to reduce costs and improve the quality of the surveillance solution.
However, be aware that this TCO is not applicable in all its details for all projects. Every project is unique, and the TCO will of course vary considerably depending on the project size, industry application, system requirements and other unforeseen attributes.