Help from their service providers to develop a solid strategy to seriously reduce costs and waste. If providers don’t take the lead on directing cost reduction, providers should expect further commoditization.
I just spent one week in Scotland working with one of the world’s largest companies to leverage their supply base and they would like their suppliers to help develop a cost reduction strategy. Over the course of my week with them, I heard at least three huge BUTs though. . . . .
But #1 — Customers are suspicious of their suppliers and providers. They don’t always trust the advice they are getting. Unfortunately, some suppliers and providers have earned that suspicion by selling “solutions” that don’t really solve their customers’ problems, by over promising and underperforming and by giving self-serving strategic advice. Providers must give strategic advice that addresses their customer’s interests. To do that though, suppliers and service providers have to have a clear understanding of their customers’ end users’ desires. What the end user wants, whether an internal or external end user, is critical to developing a solid cost and waste reduction strategy that doesn’t undermine quality.
But #2 — Customers don’t have the time to develop cost reduction strategies. Developing a more comprehensive strategy requires gathering information from many sources and analyzing often incomplete data. People are overly busy, and it is time consuming to track down information that is kept in silos. And, this is not to mention the office politics associated with sharing information internally. So, customers tend to attack price and cost in an ineffective way. For example, people will always look to save money from base costs (time and materials) and ignore ways to mitigate risk and avoid some costs all together. A savvy supplier or service provider can help customers identify risks that can be mitigated and then quantify the costs saved. Obviously, this is a more sophisticated conversation than how much a supplier is paying an employee per hour. And, equally as obvious, a risk that is successfully mitigated has a far ranging benefit to both companies.
But # 3 – Customers that outsource often lose the very talent that could do the analytical work. For example, P&G and JLL worked together to rebadge more than 500 former P&G employees to JLL. When companies outsource, they outsource many analytical functions to the service provider. More importantly, over time service provider employees move to other accounts or other service providers and take their knowledge and skills with them. This is a weak link in the outsourcing value chain. Service providers that have the personnel and analytical capacity should step up and work with their clients to develop a comprehensive cost reduction strategy.
The solution? The time has come for service provider’s to take responsibility to co-design cost saving strategies. A Total Cost of Ownership (TCO) analysis is the most effective way to help customers look beyond supplier and service provider spend for cost savings.
A TCO analysis looks at the entire spend for an item or a service. Developing a thorough TCO can be a demanding process, and all the more reason for a savvy supplier or service provider to assist their customer.
In Scotland, the team I worked with developed a TCO profile for an engine. At a very high level some large categories of cost included (but was not limited to): design, developing the RFP and selecting the supplier(s), manufacturing the engine, re-design issues, delivery and installation which included integration with other components, and maintenance over the life of the engine.
A service contract will also have high level categories of cost. For example, a real estate delivery model would include: lease payments etc. on real property, all forms of maintenance to buildings, building systems, and interior and exterior elements such as janitorial, project management, moves, and administration.
By looking at the entire arc of costs for the typical life cycle for a manufactured item or the total cost to provide a service such as corporate real estate, customers and their providers can eliminate waste and cut costs across the entire spectrum of costs.
Are you able to perform a TCO today? If you are, I suggest that you develop a proposal and talk to your customers right away. I bet some customers are ready to have this conversation. If you are not able, I suggest that you look to develop the capability.
Service providers who want to avoid further communization will develop the personnel and the industry insight to look at Total Cost of Ownership issues. Those providers that take a proactive role will survive further commoditization and provide much needed value to their customers.