One of the more essential concepts in procurement transformation is Total Cost of Ownership (TCO), which encapsulates the complex ways sourcing impacts the organisation beyond lower costs. TCO is more than just a metric – it should stand as a core principle that is deeply understood by the procurement team, and a driving force behind its business decisions.
Why is TCO so important? Because the purchase price – while naturally the first thing that comes to mind – is just the tip of the iceberg when it comes to the impact that a purchase can have on your business. When you consider TCO, you include the purchase’s influence on customer and employee satisfaction, the training required, implementation and maintenance costs, performance problems, disposal, and other logistical issues. With this larger picture in mind, it’s easier to see how much further procurement’s impact extends.
Total cost of ownership (TCO) is an analysis that places a single value on the complete lifecycle of a capital purchase. This value includes every phase of ownership: acquisition, operation, and the softer costs of change management that flows down from acquisition such as documentation and training.
Procurement professionals can leverage TCO principles to ensure that their sourcing programs are high performing by continually focusing on it throughout the sourcing process, from beginning to end:
- Before the purchase, think about the aforementioned factors that dictate TCO, and build them into your procurement process. Whether you choose reverse auction or RFx, knowing how the items or services you’re buying and the vendors you’ll work with will impact your business makes it easier to make smarter buying decisions.
- After the contract has been awarded, make sure that the savings you’ve secured aren’t undermined by a sloppy implementation or enforcement of the contract terms. Apply contract management and compliance process to ensure that the supplier is delivering on what was agreed to.
- After the implementation, share your lower TCO figures with upper management. It requires more measurement and data analysis, but demonstrating how procurement benefits the organisation is critical to ensuring c-suite buy-in, and achieving sourcing transformation.
By keeping TCO in mind throughout the sourcing process, procurement will be in a better position to drive real, tangible value to the bottom line – and effectively demonstrate that value to key stakeholders.