Below The Buying Surface: The Iceberg Of Total Cost

What lurks below the surface of the “iceberg” of total cost? This video presents a simple framework to identify the hard costs, soft costs, and silent costs that drive every “build or buy” decision.

As a company, what do you build, and what do you buy?

This classic business question and is crucial today, because the market offers more services than ever.
You can get partners to handle your IT, accounting, customer service, fulfillment, HR administration, marketing…
just about any business function you can name has focused service providers eager to serve you.
So if you can outsource anything… should you?
This answer is largely driven by your cost, and in this segment we’ll walk through a simple framework to identify the hard cost, soft cost, and silent cost of internal operations…
I call this the Iceberg because there’s a lot below the surface… but let’s start with what we can see: the hard cost.
First is labor – whether it’s a team of dozens or just a fraction of one employee, you start with the salary you pay.
Then benefits, supplies, rent… any overhead that increase when your staff grows.
Other hard cost would be software, equipment, or facilities dedicated to the function.
Sadly, this is where the analysis usually stops… but it shouldn’t.
Because just below the surface are the SOFT COSTS.
They’re less obvious, but very real.
And the main one is RISK. When things go wrong, somebody pays.
In most cases using an outside provider reduces your risk.
Let’s says a hotel hires a landscaping company to mow the grass, instead of having their staff do it.
That vendor would take the risk if the equipment fails, or someone gets hurt, or the price of gas goes up.
Now, I have to give a WIDE caution here because this does vary by situation and you can get burned if you don’t check references and get proper terms & conditions. But with the right sourcing process and agreement, your risk will be lower using an outside vendor.
The other soft cost is PROCESS.
Let’s say I personally change the oil in my car twice a year. Over five years I’ll do it ten times.
Now, compare that to someone who changes oil ten times a day as their primary job. He’s likely to do it better than I would, and be more efficient.
When your in-house process lags behind industry leaders, it usually means
  1. higher cost
  2. higher risk
and  lower quality, which can impact sales.
Now we get to the SILENT costs, lurking FAR below the surface.
First, here is the COST OF DISTRACTION. Good vendors don’t just work for you, they WORRY for you.
They clear your plate at a psychological level.
For example, nearly all companies outsource payroll, and after a couple of clean runs the CEO doesn’t give the process any thought. But imagine if management had to spend hours every week just to make sure that the best employees were being paid… that keeps them from solving other problems.
The same is true with other business processes – each one adds clutter, and if you off-load it, you can free up bandwidth for more strategic issues.
Finally, the COST OF MEDIOCRITY.
If a functional area lacks the right talent, resources, and commitment from management, it can have huge indirect organizational cost. This is a big one, and we spell out how to calculate these costs in a separate segment.
It takes a longer look to see the whole Iceberg of cost, but when you do you’re positioned to make a better decision.
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