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The Organizational Risks of not performing Robust Should Cost Analysis

Managing business transactions can be a challenging effort for Organizations. Making the right decision to provide the best value to your Customers, your own Stakeholders and protecting your Suppliers is part of the due diligence that sets excellent organizations apart.

Lowering the risk associated with these decisions can be significantly aided by applying the principals of robust “Should Cost Analysis”. Understanding what you are offering your Customers and what you expect from your Suppliers helps insure that the needs of your internal Stakeholders are met. Ideally, Should cost analysis becomes a tool to communicate to all involved and identify risks (and opportunities). Perhaps the worst case scenario for a contract is “Termination for Cause” that opens your organization to pay whatever it costs to fulfill. There are cases that have destroyed fairly large companies for this failure.

The following paragraphs frame some types of decisions that can be addressed through such an analysis.

A Truth Table is a convenient tool to analyze these types of decisions.

Right Cost-Right Reason

Right Cost-Wrong Reason

Wrong Cost-Right Reason

Wrong Cost-Wrong Reason

These types reflect your opportunities and risks concerning:

Your Offerings to your Customers

Your Dealings with your Suppliers/Partners

Your Obligations to your Internal Stakeholders

 Type 1: Right Price for the Right Reason (The Ideal One)

With a Robust Should Cost Analysis, you have accurate cost information with which to negotiate with Customers, Suppliers and Stakeholders:

Opportunities:

  • You can explain and negotiate with your Customers using solid information:
    • Scope is well defined.
    • Capabilities are matched to requirements.
    • Schedule is defined and planning is validated.
    • Cost is understood.
    • Changes can be discussed from a frank and honest position.

Efforts are matched to a spend plan and there are no surprises to the Customers. You take a contract and deliver when and at the price you agreed to.

  • You can assess and negotiate with your Suppliers effectively:
    • The supplier has identified the necessary items of compliance and allocated costs appropriately. In short, they have identified what is necessary to deliver to YOU and are charging you correctly for it.
  • Your Internal Stakeholders (Business Managers, Program Finance, Project Managers, Employees, etc) have THEIR expectations set.
    • They have an understanding of the cost and schedule to complete the project successfully.
    • You won’t spend too much of your valuable effort creating “Get Well” plans.
    • An honest opportunity to negotiate CHANGES fairly.
    • They get more sleep and have lower blood pressure.

Risks:

  • You may not win the work:
    • Some Customers choose the “Lowest Bidder” without robust analysis of the offer.
    • Your competition may be more efficient and can deliver at a lower price. (This can be a pro if your organization can find improvements in order to be more competitive).
    • Others may NOT have robust plans that accurately reflect their costs.
    • Some Suppliers “Buy the Job” to gain placement and believing that they can renegotiate higher pricing.
    • Missed opportunity to negotiate CHANGES fairly.

Type 2 Wrong Cost Right Reason

With a Robust Should Cost analysis:

  • Costs may not meet your expectations in two ways:
    • Higher Cost
      • Offerer misunderstood the requirements. (Gold Plating)
      • Offerer is not as efficient as necessary.
    • Lower Cost
      • Offerer misunderstood the requirements (Missed requirements)
      • Offerer may not deliver to requirements (Schedule/Quality)
      • Offerer is MORE efficient than expected
        • Offerer has NEW technology that might benefit, both, you and your customer.

Risks for NOT doing Robust Should Cost analysis:

  • Your Customers may not receive what they asked for:
    • Higher Cost products from YOU.
    • Non-Compliant product from YOU (or you will need to add effort to correct it).
    • Slipped Schedules.
    • Lost opportunities to reduce costs.
  • Your Suppliers may suffer:
    • Enter into contracts they can’t profit from or deliver to.
    • Lose opportunities that they are best suited to perform.
    • Continue to fail to improve their operations to remain competitive.
  • Your Internal Stakeholders may:
    • Struggle to deliver to your customers.
      • Excess Costs and Efforts
        • Rework
        • Schedule Crashes
      • Bad reputation (Quality/Delivery ratings) with your customers.
        • Loss of future opportunity

 

Type 3: Right Cost Wrong Reason

This is probably the most difficult to identify without robust Should Cost Analysis.

Risks for NOT doing Robust Should Cost analysis:

If you or your suppliers submit a Cost that Appears in line with your expectations, without a Robust Should Cost Analysis. It may not have been reviewed and planned adequately. The highest RISK results is a Non-Compliant offer.

  • An offer may be Non-Compliant in:
    • Scope
      • Non-Conforming Product
    • Schedule
      • Missed Deliveries
  • Your Customers may not receive what they asked for:
    • The risks listed above still apply:
    • Non-Compliant product from you (or you will need to add effort to correct it).
    • Slipped Schedules.
    • Additional cost of doing business with YOU.
  • Your Suppliers may suffer:
    • They may not be able to deliver to the requirements.
      • Scope/Schedule.
      • Need to renegotiate a higher price with you.
      • Go out of business
  • Your Internal Stakeholders may:
    • Struggle to deliver to your customers.
      • Excess Costs and Efforts
        • Rework
        • Schedule Crashes
        • Re-Negotiate with the Supplier.
        • Re-Contract for the necessary work
      • Bad reputation (Quality/Delivery ratings) with your customers.
        • Loss of future opportunity

Risks

Type 4: Wrong Cost Wrong Reason

  • High Cost. Why?
    • May not have worked to the actual requirements
    • May think they know what the market will bear and price accordingly
    • May not really want the work
  • Low Cost. Why?
    • May not have understood the requirements
    • May be “Buying the Job” believing that that can renegotiate higher prices later.

With the wrong cost being identified, a robust Should Cost analysis is an effective way to avoid the risks of a Type 4 decision:

  • Requirements compliance can be effectively assessed
  • Fair pricing