The cost onion

Cost. Price. Contract Value.

These are data points we’re often asked to capture from our customers’ supplier contracts. We then peel the cost onion and point out:

  • Are you talking about the total contract value over the entire term (e.g. 5 years), or the annual fee? If the former, then you won’t be comparing apples to apples since different contracts have different terms. If the latter, then you have no idea how much of a commitment you’ve made to each supplier.
  • Is payment for the product or service even specified as an annual fee? It could be monthly, quarterly, usage-based, or a fixed amount. Completely different ways of looking at it. Again, comparing whatever you can simply capture or “extract” in a single field is going to be worthless.
  • Many contracts specify multiple products and services, each with their own fee mechanism. How do you want to capture and resolve those into a single field?
  • Many contracts split the fee for a single product or service into multiple components, such as a fixed base price and a variable performance fee.
  • What about price increase mechanisms? If an annual fee increases by RPI + 5% each year, you can’t simply stamp a single number into your “Cost” field.
  • What currency is the fee specified in? You'll need to resolve across multiple currencies if you want to make comparisons.

You actually need several data points to even get close. Just a basic setup would require:

  • Fee.
  • Rate.
  • Term.
  • Currency.
  • Price increase frequency.
  • Price increase amount.

Don’t think about it in terms of data extraction or capture. This is an exercise in data modelling.