How do you use total cost of ownership analysis to optimize vendor costs and value?

Defining scope and criteria is the foundation of the TCO conversation. When determining TCO scope and criteria, I recommend including the vendors under consideration before setting the definitions. The method of consideration the vendors give to the definition can not only expand your own understanding of value, but more importantly, the effort will expose how the vendor considers their value and in turn, if they will be a reliable partner after the transaction.

Sensitivity Analysis shall be performed to assess the impact of variations in cost factors and assumptions on the overall TCO. This helps identify critical cost drivers and uncertainties.

With TCO defined, now its time to compare apples to apples. Dig deep, get all of the data you can get to make sure the TCO conclusion is accurate. Too frequently, procurement teams anchor on a single number and make decisions that cost vastly more than the single number. Dig in. Sift through the marketing and sales mess. Your organizations are counting on you to have their best interest at heart, which may not be the cheapest possible item.

Determine how you will calculate the TCO from all that you've gathered. However your math works out, make sure the same equation is applied across all vendors. If a vendor is missing a value, go back and see if you missed it in step 2. Your going to need to give some kind of determined weight to qualitative measures too. Whatever the math, have the same assessment for all vendors. The results of your calculated TCO will be the unified point from which you will determine your cost/benefit analysis and make your decision.

"Regular Review and Monitoring" should be added : TCO analysis is not a one-time exercise. Continuously monitor vendor performance, costs and any changes in the business environment. Regularly reevaluate vendor contracts and relationships to ensure they continue to meet your organization's needs.

Once complete, each vendor should get your analysis of what you have come to. The ability to share this with them gives them the opportunity to correct mistakes or speak to identified weaknesses. Do not write them off as a waste of time. The best vendors will own their weaknesses and correct any errors, and in doing so, they will show themselves to be possible strong partners moving forward...possible changing the qualitative value you've assigned to them.