In a recent blog article, we discussed how to make sure you’re creating maximum value along with the savings you’re team needs to deliver to the organization. We are periodically asked about the difference between value, savings and Total Cost of Ownership (TCO) and how each should be managed. In our opinion, while each is important there is a real difference between them with separate drivers, levers and metrics. And as you’re surely aware, there are multiple definitions of savings and much has been written on the topic.
The simplest way to differentiate the three is as follows:
- Savings: the difference between new and historic prices after a negotiation
- TCO: the actual amount paid over time for a good or service (aka realized savings)
- Value: the combination of price and non-price factors that contribute to keeping “the business” on track and moving forward
When you are looking to maximize TCO on top of savings and value, use these levers:
- Do your homework
- Spend Analysis. Use it
- Alignment with Finance
- Streamline the linkages between sourcing and procurement
- Ask for help
TCO can be a hot topic of discussion, even argument, inside an organization. What people can’t dispute is that lower TCO is good.
- Do your homework – There’s an adage in business that “he who creates the presentation controls the discussion” meaning that it’s always best to be the first to propose a topic and, importantly, a solution. Get in front of the TCO conversation and make a proposal as to how it should be defined, measured and tracked. While it might entail some work on your part, chances are that others will be willing to use your definition as the standard (or at least the starting point).
- Spend Analysis. Use it – It is nearly impossible to clearly manage TCO (and savings leakage) without a strong spend analysis program in place. One of the key value drivers for Spend Analysis is Purchase Price Variance (PPV) which allows you to easily identify disconnects between what you thought you should pay and what you actually paid. If you’re struggling to come up with a clear value proposition for the CFO on why you need Spend Analysis, start here.
- Alignment with Finance – Finance can be your friend or your adversary. It’s up to you. Since their numbers are generally going to be the ones that “count”, you’re better off with them in your corner. Take some time now to sit down with them and understand how they look at TCO, why it matters to them, and how they plan to measure it. If you can align your language and goals with Finance PRIOR to talking to stakeholders and spend owners, you be in a much better position to avoid time-wasting conflicts down the road.
- Streamline the linkages between sourcing and procurement – If your organization uses a P2P platform, make sure that you’ve got both good technical and process linkages between the two. For example, Scanmarket can seamlessly send contract and bid results to most P2P platforms. If you’ve dealt with P2P systems and teams, you’ll know that one of their key challenges is supplier and catalog setup and maintenance. If you make it easier for them, they will be a powerful ally when measuring TCO down the road. Additionally, P2P can be a fabulous source of data and reporting when identifying TCO results down the road.
- Ask for help – We often preach the importance of reaching out to stakeholders and suppliers and it’s certainly true for this topic. Stakeholders and suppliers are the ones who live with the purchase and therefore have the most impact on the transformation of your “neat and clean” savings just after a negotiation to the “real world” total cost of ownership. Ask them how you can help make it easier for them to reduce additional costs that will erode your TCO goals.
Nowhere is the difference between savings and TCO more pronounced than in government procurement. In the US, there’s been an online meme circulating that perfectly captures what can happen when a promising initial contract runs into trouble down the line.
TCO is either something that you’re measured on or something you know you should be doing. Either way, use these approaches to help craft an approach that works, is realistic, and most importantly is accepted by other groups in your organization. This will prepare you for a successful 2017 and (hopefully) cut down on some of the metric disputes next year.
For more information on these approaches or to learn more about how Scanmarket can help you achieve your business objectives, please visit us at www.scanmarket.com or contact your Scanmarket account manager.
Easy. Proven. Results.