08 September, 2016

Buying cheap versus buying results

Why do corporate (and especially government) buyers keep confusing cheapness with value? Time and again I’ve seen the best vendors lose on price because the buyer could “get it much cheaper elsewhere”. The classic example is professional services charged by the hour. Any good manager of people knows that you pay your better staff more because they are more than worth it to you. For example, a good IT designer/developer will work out many times cheaper in the long run. They understand the business need quicker, design quicker, design better, write code quicker, write better code with faster performance and fewer bugs, and their software is cheaper to maintain. That can equate to a 10-30 fold lifetime cost difference - the saving more than outweighing any hourly rate difference. And that’s before you factor in the risk of non-delivery - much lower with better suppliers.

But many corporate buyers persist in penny-wise, pound-foolish buying practices. I have interests in several firms who sell products and services to other businesses, and my attitude is clear. I put a lot of emphasis on getting the price/value/cost proposition right, but if I can’t persuade you of the value for our prices, I’ll walk away before discounting. I’m not in business to subsidise anyone else’s business.

As a board member, I often see proposals for approval brought forward by managers proudly telling me that they’ve got the lowest input costs. All too often, I send them away to redo the basis of purchase and decision. Get me the best price and the best people to deliver the best outcome, not just the lowest cost of the inputs. If it has to be input-based, hire the best you can (while avoiding bloated suppliers and being sensible on price). It may cost more theoretically on paper, but I’ve rarely seen it cost more in actuality. On the contrary, the lowest input cost approach usually blows out on time, cost, reliability and efficacy.

Managers and buying teams - take note: top executives and boards much prefer effectiveness over cheapness.  But that's not a reason to buy only from big-name suppliers.  A small agile supplier can often be an innovative, effective and low-cost option.

First posted 29 July 2009

1 comment:

Richard Brathwaite said...

Have to agree. In addition, there is often far to much focus on unit cost rather than total cost, including change management, freight, but above all, work in progress. Too many companies buying from China/Asia with huge stocks in house and in progress, with little flexibility and all the costs of stock. Local supply and simple logistics is often better overall value. Richard Brathwaite.