Return on Investment as a Decision Criteria
In most sourcing decisions, the attempt is to equalize competing vendors on all the other criteria like specifications, quality, delivery, commercial terms and then apply price as the decisive criteria. However, one criterion that has been used sparingly is Return on Investment.
While comparing quotations from vendors, while negotiating as well as in trying to finalize a vendor, typically organizations have used the unit or total price as decision criteria. In most sourcing decisions, the attempt is to equalize competing vendors on all the other criteria like specifications, quality, delivery, commercial terms and then apply price as the decisive criteria. In various instances especially where there is an ongoing cost that the material or service being purchased requires in the form of maintenance etc., the concept of total cost of ownership has also been applied as a decision criteria.
However, one criterion that has been used sparingly is Return on Investment. Any buying decision can be viewed as an investment for an organization especially in the case of services like training, outsourcing services which are usually linked to some business metric that the organization wants to improve. In such cases, using the traditional basis of total or unit price may actually be counterproductive since the lower cost service provider may not be the able to influence the business metric to the expected levels. In several cases, the purchasers may not be aware of the methodology of computing return on investment and also they may not have all the inputs required to do so, (especially the intangibles).
In these types of services there are several factors that are seemingly intangible like experience, expertise, superior technology, innovation and investments being provided by the service provider. These are extremely important but more often than not, get left out of the decision criteria primarily because the purchasers are unable to quantify them. So how do we go about quantifying the intangible aspects of services provided? ... That's food for further thought...