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SAP Analytics
Thought Leadership

Penny Wise and Pound Foolish: Why Your Focus on "Cheap" is Killing Your Profits

Posted by Jamison Chochrek on Tue, Oct 07, 2014 @ 07:10 AM

Penny Wise & Pound FoolishRemember the great 1996 classic flick, Jerry Maguire? Do you recall that moment early in the movie when Tom Cruise’s character writes his memo before he got whacked? His coworkers clapped and cheered. They did so because they believed in what he said. Then corporate reality set in and they had to get back to work… back to business as usual!  So did Bob “Business as Usual” Sugar win in the end?

Throughout the movie many characters call the memo a “Mission Statement”.  Well, folks, after 20 years I have had it!  I am writing my “memo” in this blog.  While I am not staying up late and photocopying my “memo” to be hand placed on my colleague’s seats, I hope this has a (somewhat) similar effect. 

Today’s corporate mentality seems to be stuck in “cost cutting” mode.  We as a global economy are generally stuck in the “Walmart Mindset” of cheaper = better.  I am here posting that I disagree.  Cheaper is cheaper and that is that, but cheaper is not necessarily better. Cheaper is not sustainable or profitable long term! More focus needs to be placed on quality.  To build my bunker of defense, I will begin with referencing the great William Edwards Deming (October 14, 1900 – December 20, 1993). Deming was an American engineer, statistician, professor, author, lecturer, and management consultant.  Dr. Deming figured out that by adopting appropriate principles of management, organizations can increase quality and simultaneously reduce costs (by reducing waste, rework, staff attrition and litigation while increasing customer loyalty). The key is to practice continual improvement and think of manufacturing as a system, not as bits and pieces. Dr. Deming's philosophy was summarized by some of his Japanese proponents with the following 'a'-versus-'b' comparison:

(a)    When people and organizations focus primarily on quality, defined by the following ratio, quality tends to increase and costs fall over time.

 SAP BPC Implementations-Column5 

(b) However, when people and organizations focus primarily on costs, costs tend to rise and quality declines over time.

For example, I go to Home Store A and they have a widget for $10. I then go to home Store B and see a similar widget made overseas (with lower quality standards) for $6. Which one do I choose?  Initially I may choose the cheaper widget because it saves me money/time and meets my needs.  Over time, Store A lowers their price to $5.50 and the low price leader follows suit (because it is ingrained in their business model that lower cost is better) and sets their price at $4.99. Thus the vicious cycle increases until…THERE IS A RECALL! One store crossed the line on the pricing battle and lost sight of quality.  Quality equals customers loyalty and a long-term viable strategy.      

Parlay that into BPC deployments and start-up organizations that claim to be “cheaper”.  At some point in this vicious cycle, the client ultimately gets what they pay for and there is a recall, or a rework, of their initial spend.  We have seen a rash of clients who have deployed EPM/Analytics software and chose the “low cost” deployment partner.  In the end, the solution did not meet their quality standards and they were left with a broken or incomplete solution.  They ultimately pay more because of the required remediation work than they would have paid had they initially chosen the higher quality partner.  Here is a classic example- a client pays $X to implement a cheap solution, then hires another firm to fix the solution for $.5X.  In the end, they paid $1.5X to get where they need to be.  Ironically, had they chosen the higher quality firm in the first place, they would have had a single deployment that got things done correctly for $1.25X; so you could say that in this example choosing the “cheapest” bid ultimately cost $.5X more than it should have.  And so goes the average “rescue” conversation we have on a weekly basis. The unfortunate part is the cost is really even more than that. When you factor in the internal costs of initial procurement, and the cost to re-procure, the right solution it is often double

The moral of this message is that with regards to BPC/EPM implementations, the "cheapest" choice almost always indicates a significant lack of quality.  When making decisions around EPM/BPC, I encourage you to pay more attention to the solution that genuinely meets your needs, and not some arbitrary budget.

I encourage anyone interested in best practices for a BPC/EPM implementation to visit Column5EPMEvents.com. Column5 has just announced the EPM Education Series, which will provide even more in-depth instruction and case studies to ensure the success of your projects.

Learn more about BPC/EPM implementations at one of our free upcoming webcasts!

View Webcasts!

Read more about best practices and case studies for a  BPC/EPM Implementation!

7 Deadly Sins of a BPC Implementation
Using the Power of Visual Basic in EPM 10 Reporting
How EPM Caught the Pizza Bandit!
Column5 Launches the "Close Cycle Rankings 2014" in North America


Topics: Best Practices, Thought Leadership, EPM ROI, Performance, Implementation


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