The lessons of this economic downturn are many, but one is that it is critical to manage costs. Saving company money (or spending company money more efficiently) not only is a logical objective but also crucial to an employer’s viability and survival. Now, as never before, it seems that all expenditures are subject to review and scrutiny—often down to every line item of cost.
The process of inspecting costs in selected areas, or even in individual expenditures, sometimes can obscure the most obvious cost-saving opportunities, which can be found by looking at the total cost of ownership (TCO). While the difficult economy may have caused employers to focus more on mobility cost control, the reality is that mobility products and processes have continued to be treated as independent variables, rather than connected and linked.
TCO is the methodology that progressive employers are using increasingly to manage costs—and mobility costs are a perfect target for application of this expertise. It is the TCO approach that provides a consistent framework to track and analyze all costs for a holistic comparison of all programs over all mobility service providers/vendors. It also provides a standardized framework in which to track and evaluate costs and value during a defined time period and/or program lifetime and provides the “base point” for what should be required by employers of their providers—namely ongoing cost reduction and process improvement.
The conventional approach to cost control reinforces the methodology in which total mobility costs are obscured by multiple providers with many separate billings for everything from homesale and homefinding to household goods moving and storage and temporary living, along with numerous other expenses.
Mobility service provider fees are about 3 percent of the total cost of the mobility spend. In most cases, 97 percent of total mobility costs are not directly visible to clients. As a result, many employers are procuring mobility services based on the visible 3 percent of the mobility service providers’ fees and assuming incorrectly that the other costs are far less controllable.
In addition to missing the significant portion of the total mobility cost, employers have limited visibility into the key performance indicators (KPIs) that drive costs and service levels. This lack of transparency makes it difficult to compare sub-suppliers and how effectively they are spending company dollars.
This challenging residential real estate market has created an opportunity for HR and procurement managers to rethink the way they evaluate and measure mobility costs and how cost visibility can affect the bottom line. By questioning the traditional cost-plus-fee-based approach to supplier pricing and simultaneously adopting a TCO approach, employers can gain a complete picture of all mobility costs that hit the bottom line—both directly and indirectly.
TCO ensures that an employer is evaluating the whole picture and analyzing the effect of cost expenditures at all levels with not just primary suppliers but sub-suppliers, as well. Properly applied, this approach also should result in increased transferee satisfaction and service levels. Armed with this information and in partnership with a global supplier with TCO expertise, employers can establish controls to affect process change and sustainable performance improvement throughout the entire supply chain.
To gain clarity and visibility across the entire mobility supply chain requires the establishment of a common operating platform and methodology. This can be a challenge for a number of reasons, including the reality that costs may be difficult to capture and compare across different accounting periods. Because mobility costs can occur during more than one fiscal year, flow through a variety of departments, and incurred in different areas of the country or globe, the analysis of all elements of supply-chain costs can be difficult.
How, then, can HR and procurement departments better meet this challenge? The answer is by taking a systematic and measured approach to evaluating the entire cost structure of mobility services, which can help reduce and/or eliminate hidden and wasteful costs.
What It Means to the Bottom Line
Properly executed, the TCO approach can result in significant mobility cost savings for employers. On average, employers can save an estimated 10 to 15 percent on their total mobility costs. In other words, by looking at the “big picture,” this cost inefficiency and “waste” can be eliminated with no reduction or even an increase in service levels to the transferees.
The financial advantages of the TCO methodology easily can be seen when applied to the homesale process. Accounting for an estimated 40 percent of an employer’s total mobility costs, homesales typically exemplify the practice of looking at this one cost event; but doing so based solely on the expenditure of fees charged (directly or indirectly) by the mobility service providers is not the whole story.
For example, the costs incurred from homesales often continue to accrue long after the transferee has physically moved. This situation occurs in one of two ways: when there is a “fall through”—in a buyer value option-type (BVO) program; or a home does not sell to an outside buyer and the guaranteed offer is taken by the transferee, which results in the home going into an employer’s inventory. In today’s poor real estate market, an estimated one in two homes ends up in inventory, where both direct and indirect costs increase rapidly.
Homesale costs are just one piece of the total mobility cost spend that often are not properly evaluated or measured. Homesale costs, especially the cost of the homes that go into inventory, are not just affected by the real estate market but also by the systems and solutions an employer’s mobility service supplier may or may not have in place to proactively increase amended homesale rates while also lowering loss on sale and reducing the home inventory risk to the employer.
Implementation of a TCO Process
First, the strategic procurement of mobility services both domestically and globally should begin with identifying a qualified supplier that can help an employer understand where inefficiency and waste exist in the total mobility spend.
Most mobility programs have significant cost-saving opportunities. This is the result of programs that have evolved over time with too many people responsible for too many costs and not enough single-point accountability throughout the process. Accordingly, it is important to identify and assemble all the cost elements that comprise a mobility program, which can include homesale, expense/tax management, temporary living, destination services, and similar areas.
A supplier can help manage the evaluation process by auditing and estimating these cost drivers by conducting a thorough analysis across company divisions, geographic regions, and mobility suppliers at all levels. The supplier can take a third-party objective view of a company’s supply chain and establish expectations and accountability for driving efficiency and cost-effectiveness through process improvements and cost reductions.
Once the individual elements are identified, a standard set of metrics must be defined so that costs can be evaluated. In establishing these metrics, one needs to consider what risk and variance levels are acceptable. For example, in the cost-critical area of homesale, variances can exist in every area—from the amended value rate and direct homemarketing costs to the days-in-inventory/days-on-market costs, and the most probable sales-price variance.
Since the real estate bubble burst a few years ago, the average direct homesale costs have become even more important. Employers must establish a baseline of acceptable risk to be more aware of the effect these elements have on the bottom line. While homesale is the largest contributor to the overall cost, it is just one area that can affect total costs and the satisfaction of the employer and the transferee.
The final step in implementing a TCO program is standardizing and tracking these costs. Strategic procurement must enable improved sourcing decisions, which create value-added benefits to the employer beyond simple price reductions. There are several benefits in looking at these sourcing decisions holistically, including the ability to leverage volume by awarding more business to certain suppliers that have the proven ability and the demonstrated track record to save money without decreasing benefits or transferee satisfaction.
The Whole Picture
In summary, HR and procurement managers have long treated and sourced mobility products and processes as independent events. Without a common operating platform and methodology, the opportunity for lowering overall mobility costs and sustaining cost-efficiency over time has been difficult to achieve.
By using a TCO approach to workforce mobility, employers are given systematic, hard data on the efficiency of each mobility dollar. This approach not only tracks all costs associated with the mobility programs, but also provides the opportunity to increase both client and transferee satisfaction and services levels, which together drive increased value in the mobility spend.
David B. Barlow Jr., SCRP, GMS, is a senior vice president and senior consultant at SIRVA Relocation, San Ramon, California. He can be reached at+1 925 824 3109 or david.barlow@sirva.com.