Day 5: Cost savings & total cost of ownership


Cost savings. A term used often in business when trying to argue for change. “If we do this, instead of that, we can save mucho money.” It often makes a lot of sense. The field above was (and I expect still will be) made of artificial turf. There is a rather pricey backhoe sitting idle (and will be for three days) and a hundreds of bags of what I’m guessing is turf. Not annual maintenance type stuff, but a full overhaul.

Artificial turf fields are an interesting example of the cost savings argument. We can all imagine how those conversations go. Someone from council, or a staffer, says “Let’s convert a few of our fields to turf.” Everyone gets excited until the reality-checker says, “Wow, that will cost a lot of money. We cannot afford that. Backhoes, turf, design, lots of upfront costs.” Then the maintenance folks say, “Yah, but we will save a lot in operating costs. No watering, no re-sodding, no fixing holes, or removing rocks, no lawn-cutting. Awesome.” So someone is asked to run the numbers.

The number-running has a tendency to go something like this: the cost of the turf field is underestimated, and the cost to operate a grass field, well, somewhat overestimated. And even then, payback in years seems just a little too long for everyone’s liking. So during the business case discussion, someone who actually remembers what the fields are used for chimes in and says, “What about the soft benefits? The kids can start their season earlier, end it later, and play in torrential downpours, even on snow.” Everyone nods, and agrees that this is priceless. The balance is tipped. Turf field it is.

Now, arguably the business case makes sense. The field pays for itself over a period of time, due to the avoidance of annual operating costs. But remember the part about underestimating the cost of the turf field? Well, this happens a lot. Why? Because often the change is new. Nobody really knows for sure. And the folks who sell the turf field, well, they like to underestimate the ongoing costs as well.  What many struggle with when looking at something that has such a high upfront cost is the reality that the initial purchase is just the beginning. The initial cost plus the ongoing costs (including loans, etc…), less the resale value, are, collectively, the total cost of ownership.

Total cost of ownership applies in many situations. Take, for example, a car.  Often we think about the initial cost of the car, but there are ongoing, annual costs, that must be taken into account: insurance, maintenance, gas, etc… Along with the resale value. Sometimes the cheaper car on the lot can turn out to be a lot more expensive in the long run.

So when I looked at the turf field this morning, and the backhoe, and the hundreds of very large bags of little bits of plastic, I mumbled to myself, “I hope someone factored this in to the business case.”

Published by Gwyneth Edwards

Academic and practitioner in the field of strategic management.