Price or Value? Go Beyond the Quick Price Reduction Fix

Priceberg

Adjusting to the Vested Outsourcing business model requires a major change in thinking and approach to total costs, pricing and value in the outsource relationship.

Moving away from the conventional and quick-fix focus on price to a shared value and collaborative mind-set that might even involve leaving money on the table is a difficult concept to grasp and frankly a major leap for many. But it is a hallmark of the Vested approach and ecosystem.

Luckily there is help on the price vs. value and Total Cost of Ownership (TCO) issue in the form of a recent paper (available for download from the IACCM library) and presentation from SKF Group, a global supplier of products, solutions and services within rolling bearings, seals, mechatronics, services and lubrication systems. The basic message of Todd C. Snelgrove, SKF’s General Manager, Value, in “The way to drive real sustainable profit to the bottom line,” is that “It’s not how little you pay, it’s how much get.”

In a nutshell that’s the basic difference and tension between  price and value.

In The Vested Outsourcing Manual, set for publication June by Palgrave Macmillan, TCO is defined as the foundation for any Best Value decisions that need to be made. A TCO analysis includes determining the direct and indirect cost of an acquisition and operational costs. TCO’s purpose is to help make clear and comprehensive decisions when it comes to pricing.

When companies and service providers collaborate to create value rather than haggle and squeeze each other on pricing, the pie automatically will become bigger; there is more to go around.

As clearly shown in the “priceberg” illustration, price is a small part of the total picture; many hidden costs of ownership lurk beneath the surface and can punch major holes in a deal if they are overlooked.

“Unfortunately, the spirit of joint effort for joint benefits is rarely the buyer-seller modus operandi,” writes Snelgrove.

Buying on total cost, or TCO, has become an often-used industry mantra in the last decade. But widespread implementation of the concept, which actually dates back to the 1950s, is another matter.

Snelgrove says a 2007 study by Strategic Account Management (SAMA) found that customers rank Total Cost of Ownership nearly two times as critical as price. “Purchasers are beginning to realize that price is just one sub-component of TCO.”

When the supplier-customer relationship is seen as a true partnership, he continues, “the supplier will be motivated to spend these limited resources with partners, not customers who haggle over price.

“In place of ‘squeezing’ suppliers for lower material or component prices, companies are now looking to partner with a select few suppliers who have the expertise to look at the complete picture.” The value of these improvements can add substantially to the bottom line—much more than the relatively small gains from price concessions, he adds.

Those words mesh well with the Vested model.

The Vested approach goes beyond simple cost-slashing to make a deal by examining all hidden costs, and embracing an ecosystem of value initiatives, innovation and incentives that base the payoff on created value.

Companies that use a Vested Outsourcing approach do not spend much time talking about how a business model can give their service providers the opportunity to make more money. They focus instead on how the model delivers better value or better performance at the same or lower total overall lifecycle cost.

The lesson for outsourcing is clear, as clear the need to navigate around the priceberg: Cooperate and base pricing decisions on TCO and value. That means documenting total costs transparently and from an end-to-end perspective by capturing and understanding the costs of the service provider and the company.

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