From TOTEX to TCO

In the previous lesson we separated CAPEX (the purchase) from OPEX (operation). But a decision is rarely made on one or the other: it is made on both together. That is the role of two closely related notions: TOTEX and TCO.

TOTEX — adding the two pockets

TOTEX means Total Expenditure. It is simply the sum:

$\mathrm{TOTEX} = \mathrm{CAPEX} + \mathrm{OPEX}$

The term comes from network industries (water, electricity), where regulators wanted to stop pushing companies to capitalise everything. Reasoning in TOTEX makes you neutral between buying and operating: only the total cost matters.

TCO — the cost over the whole life

TCO, Total Cost of Ownership, goes one step further: it adds all spending over the whole life cycle, that is CAPEX plus the sum of annual OPEX and the end-of-life cost:

$\mathrm{TCO} = \mathrm{CAPEX} + \sum_{t=1}^{n} \mathrm{OPEX}_t + C_{\text{end of life}}$

• acquisition (CAPEX);
• operation and maintenance (OPEX), year after year;
• downtime, lost production, obsolescence;
• end of life: decommissioning, recycling, clean-up.

For long-lived assets you discount the OPEX (a euro in 15 years is worth less than today). TCO is the real basis of comparison between two solutions; asset management makes it a central principle, formalised in the ISO 55000 standard.

An example that overturns intuition

Compare two variable-speed drives for the same motor:

	Economy drive	Premium drive
Purchase (CAPEX)	€2,000	€3,200
Energy + maintenance (OPEX/yr)	€1,800	€1,300
Service life	7 years	12 years
TCO over 12 years	≈ €25,600*	≈ €18,800

* it must be replaced after 7 years: a second purchase falls within the 12-year window.

The “economy” drive is cheaper to buy but markedly more expensive to own. That is the whole point of TCO: it makes visible what the purchase price hides.

The reflex to acquire

Faced with two quotes, never compare the “price” lines. Always ask three questions:

1. How much does it consume and cost per year?
2. How long does it last?
3. What does end of life cost?

The cheapest to buy is rarely the cheapest to own.