Applying Total Cost of Ownership to Services
November 13 2020, Sourcing
Total cost of ownership, or TCO for short, is a term most usually associated with assets, goods and software. Procurement takes the base price of the asset, add the cost of shipping, import duties and warehousing and then finally work out any forecasted costs of managing, repairing or decommissioning the asset through its lifetime within the business.
Forecasting TCO is a practice that should be undertaken by all organisations who are keen to get a truer picture of their bottom line (and how to improve upon it). However, as Gartner’s January 2018 TCO analysis whitepaper shows, it is a difficult process to adopt, hampered further once you attempt to project costs (or potential savings) past the initial unit base price. Having access to data from multiple areas within the organisation is key and this is sometimes where most of the difficulty lies, with many assets having cost savings reported by other functions in the business.
So, to apply the same principles to the cost of delivered services, should it be approached in the same manner? And how do you go about quantifying something that pertains to a commodity that is practically virtual, and not a physical object?
Breaking it down
It’s safe to say that with services, the majority of cost is borne at the ‘front end’ of the lifecycle. Sourcing, vetting and onboarding suppliers to undertake the work for instance take time and dedicated resources to manage. The average tender sees upwards of 30 responders to qualify and evaluate before the shortlisting and the selection process can even begin. Throw into the mix contract negotiations and it’s easy to see why most of the costs associated with purchasing services happen before the service is implemented.
Short of contract management responsibilities for the duration, the costs to run a service once it is implemented can be fairly minimal, however, there are instances where the reverse is true. Legal or financial services for instance can sometimes be very ‘hidden cost heavy’ if they produce multiple invoices per month (then spread that across multiple legal and finance providers all with their multiple invoices). It is fairly common for the total cost of processing an invoice to be upwards of £50 in some organisations and when multiplied by the frequency they are issued, the cost to simply handle invoices can be a big factor in TCO calculations.
So, in summary, services could be broken down to these following areas to get a clearer picture of the costs associated with them:
- Sourcing of new suppliers
- Onboarding of new suppliers
- Managing the tender process
- Contract negotiations
- Ongoing contract support management
Applying the methodology
As the Covid crisis is now showing us, more and more organisations are looking for ways to not only ensure they have access to lower unit cost prices for commodities but there is a new-found focus to also reduce their total cost of ownership throughout the lifecycle. With a clear picture of how most of the parameters of procuring services can be quantified (and the subsequent lifecycle), there is no reason that TCO for services can’t also be added to this ‘to-do list’ for proactive CPO’s.
Out in the B2B services’ marketplace, organisations have numerous options available to them to better manage parts of the procurement process and adopting these in the right places would go some way to bringing cost of ownership down, without decreasing the quality being delivered.
Indeed, sourcing and contracting are some of the staple offerings that many BPO’s provide and often come with an element of spend management built-in to give you better oversight of where savings can be realised. However, having too many individual ‘best-fit’ solutions for each stage of the process may end up making it harder to get a clear picture of the data then handling all the steps in-house.
One thing is for certain, businesses across the globe are focussing in on the benefits that non-cashable savings have on the overall bottom line and working out the total cost of ownership for both goods and services is the smart way to start tackling it.
To find out how Maistro is enabling procurement teams to reduce total cost of ownership with a complete end-to-end solution, get in touch