Whether you’re measured on it or not, Total Cost of Ownership should be at the top of your list of priorities for 2020.
In a recent article about How to Maximize Procurement Value and Savings, we discussed how to make sure you’re creating maximum value along with the savings your team needs to deliver. We are periodically asked about the difference between value, savings and Total Cost of Ownership (TCO) and how each should be managed. While each is important, there is a real difference between them with separate drivers, levers and metrics as well as multiple definitions of savings.
The simplest way to differentiate the three is as follows:
- Savings: The difference between new and historic prices after a negotiation
- Total Cost of Ownership (TCO): The actual amount paid over time for a good or service
- Value: The combination of price and non-price factors that contribute to keeping the business on track
Additional read: Procurement Value Beyond Savings
When you are looking to optimize TCO on top of savings and value, use these levers:
- Do your homework.
- Spend Analytics. Use it.
- Align with finance.
- Streamline the linkages between sourcing and procurement.
- Ask for help.
1. 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 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.
2. Spend Analytics. Use it. It is nearly impossible to 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). PPV 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, read more about the 5 Things Data Can and Can't Solve in Sourcing. More importantly, if you don't currently have a robust, automated spend analysis system in place by now, you're falling behind.
Additional read: 5 Steps to Drive Value With Tail Spend
3. Align 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 will be in a much better position to avoid time-wasting conflicts down the road.
4. Streamline the linkages between sourcing and procurement. If your organization uses a P2P platform, make sure that you have good technical and process linkages. For example, Scanmarket can seamlessly send contract and bid results to most P2P platforms. If you’ve dealt with P2P systems and teams, you know that supplier and catalog setup and maintenance are key challenges. If you can 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.
5. Ask for help. We often preach the importance of reaching out to stakeholders and suppliers, and it’s certainly true here. Stakeholders and suppliers are the ones who live with the purchasing decisions and 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.
Additional read: Are you getting the best supplier prices? Are you sure?
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 a system that works, is realistic and accepted by other groups in your organization. This will prepare you for a successful year and cut down on some of the metric disputes next year.