TCO=Value Destruction??

That is the title for the next meeting of PERT (Procurement Executives Round Table) being held today.  For the TMG alumni and longtime readers of this blog, that will not be a surprise (sourcing is dead and few others) but I’m sure we will have some raised eyebrows at the meeting. While being provocative, the title is also meant to challenge our long held views and thinking.  How long will we continue to use metrics that measure our definition of value (TCO) and not our customers’ (stakeholders)?  And the longer we continue to do that, the more value we will potentially destroy along the way.

You’ve heard us ask these rhetorical questions before but how many Chief Marketing Officers have gotten fired for going over their marketing budget?  Zero – None – Nada.  And if by trying to save on the marketing TCO we end up impacting the customer retention rate or increasing the per customer acquisition cost or the closure rate and lead time, we may have destroyed a whole lot of value?  How about the EVP of HR who has a hard time recruiting and retaining employees and we walk in with a solution that saved money on food services but impacted the QOWL (Quality of Work Life) negatively?  Is she more interested in the lowered TCO that we are promoting or the Value Destruction that we caused?

We will have many executives and CPOs in the room today and I’m sure we will have a vociferous debate on this topic but clearly this shift is starting to take hold more and more in our professional zeitgeist.  While lowered cost is not something to give up on and lowered cost clearly adds value, focusing on it exclusively does have significant negative impact on value – especially as it is measured by our customers.  And value can only be that which is measured by our customers – not as measured by us.  Just take a look at this simple chart:

While a little too obvious, there can be no argument that many of the metrics or as we call them – Value Drivers -listed against each functional area have a significant impact on driving (thus Drivers J) their decisions and behaviors.  If all of our activities, decisions and behaviors in Sourcing are driven by just TCO, then we are obviously destroying value as far as our customers are concerned unless we can categorically prove to them that we are not!  And even if we do prove that, all we have done is reached a stage of neutrality with them – till we prove that we are actually enhancing their Value Drivers.

While making this shift from TCO to Value Drivers is complicated, Sourcing/Supply Chain organizations that have started down this path are creating competitive advantage for their companies and are finally being considered critical to the success of all of their customers (stakeholders).  We will be sharing some techniques today to help make this transition and capturing what many of our members are doing in this area.  A strong dose of Next Practices is what we recommend to our clients who are interested in making this transformation and that is what we will be discussing today.  It all does start with an acknowledgement of the issue and then a systemic approach to solve what is a systemic problem.  If you would like to learn more about what transpired at the PERT meeting, just let us know.