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CIO Review >> Magazine >> April - 2013 issue

Beware the TCO Trap: Confessions of a Recovering Technophile

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Founded in 1996, Ariba is a provider of collaborative business commerce solutions. The Sunnyvale headquartered company was acquired by SAP AG (NYSE:SAP) in 2012 for $4.3 billion.

It is an understatement to say, the global economic recession has heightened the focus of cost cutting and elevated the importance of spend management within almost every organization. The executives I speak with are getting advice to "install software" from vendors, analysts or even their own IT departments when they ask how to resolve these challenges. I am even more concerned with the recommended focus for these software investments: "get the best Total Cost of Ownership (TCO)."

There is much to be said for the process efficiencies and improvements enabled by software. And any smart shopper would want to secure needed technology at the lowest cost. Yet, blind faith in the power of enterprise software and a myopic focus on TCO is a dangerous concoction that can lead you further from your intended business results.
In fact, if I have learned anything from my decades of examining and supporting spend management strategies it is this: You will not achieve your savings targets and transformational goals with technology alone.

To be fair, I may have contributed to today's prevailing technology myopia throughout my career as an analyst and, more recently, as a marketer. And I certainly helped make TCO top of mind in my role as a Software as a Service (SaaS) evangelist. Yet, as a reformed technophile, I'm here to testify that success in any business improvement initiative – whether meeting an aggressive supply cost savings target or streamlining your accounts payables process – requires the right combination of strategy, planning, skills and technology.

My experience shows that, when it comes to spend management, companies too often mistake the selection and implementation of technology as their objective. They focus on things like TCO and ROI. And, while those are important measures, they do not necessarily guarantee you will achieve your broader business objectives. In fact, you could easily secure the best TCO on your technology investment and still not move the needle on achieving measurable improvements in the business.

I was reminded of this recently when speaking with a prospect at a large U.S. company that had set out to cut supply costs by $80 million within 12 months. The company's procurement group was convinced by consultants and its IT department that the solution to this goal was to deploy a Source-to-Settle software suite.

In my opinion, the company was focusing on the wrong thing. While getting the most value for your IT investment is important, it would not guarantee that you will meet your business objectives. Instead, the right approach is to start by assessing any investment whether in technology or people or consultants by how well it can help you achieve your business objectives within your stated time frame.

In the case of spend management, the objective should be to develop a savings enablement or spend transformation program that could be partly enabled by technology, is focused on achieving business results. For the above example, we recommended the following approach to achieve savings goals:
• Devise a strategic plan to attack the categories where you can negotiate the best value agreements, enable them quickly and drive compliance to ensure you realize your savings goals.
• Select and deploy the right solution footprint to improve controls and standardize efficient processes and compliance.
• Enable supplier content, transaction and financial settlement to ensure sufficient spend coverage.
• Provide sufficient training and change management to ensure stakeholders both adopt and understand the value they get from the process.

This same value enablement methodology should be applied to any improvement program that is important to your business - from securing and managing an agile contingent workforce to improving cash flow.

In short, driving improvements in your business should be considered in the same vein as driving improvements in your personal life. Getting something at the lowest total cost is a noble goal, but it should not be confused with the intended objective. Whether you are buying a treadmill to shed pounds and improve your cardio performance or buying a Source-to-Settle solution to keep your business lean and fit, your first order of business should be on solving problems and producing measurable and beneficial results.