Articles

01/06/2005

Applying Process to Services
BY : John F. Martin

It is possible to impose order on contracting for outside services. Here are the pitfalls to avoid.

Mike, a procurement analyst for a large global telecommunications provider, found that marketing costs involved huge expenditures with external providers. There was little oversight or involvement with procuring these services around the world.

So Mike presented the vice president of marketing an end-to-end, flexible process to improve supplier selection, gain competitive bids and enforce contract terms to ensure all services are delivered as contracted. The new process could yield substantial savings and improved quality for the externally purchased marketing services, while giving much more oversight and visibility into the marketing services spending.

However, the vice president declined to move forward with the new process.

"While this type of procurement process may work fine for buying equipment and office supplies, our marketing vendors are highly specialized and specific to each geography," said the VP. "How can a procurement analyst sitting at his desk in Denver define the specifications for a new television ad in China, much less credibly evaluate suppliers and end deliverables. Using competitive bidding slows everything down and leaves us with suppliers who may provide a low price but deliver sub-par work."

The Complexities of Procuring Services
At a typical large company, procurement is increasingly handled by a central group that selects suppliers, negotiates terms and ensures compliance to the contracts. Companies have found that centralizing procurement and enforcing consistent processes leads to lower costs as well as greater control and visibility into spending essential in this cost-conscious, highly-regulated world.

However, one area of procurement spending continues to resist attempts at centralization and control: spending on outside services. According to CAPS Research, large companies spend an average of 11 percent of their revenues on outside services in areas such as consulting, contract and temporary workers, facilities management, as well as marketing and accounting services. Even with this large amount of spending on services procurement, groups have much less control over and visibility into services spending than for goods procurement. Two-thirds of procurement executives say services are more difficult to manage than goods.

The reason is that services are much more complex, fragmented and difficult to measure than goods purchases. Many services are local, with different suppliers by geography. Others involve people coming on site to deliver the services, which often results in issues around security, safety and personnel management.

Additionally, most services purchases are unique. The requisition format is different for every type of service (e.g., marketing, print, contract workers), and requisitions within the same type of service are often unique for every purchase. Even worse, services deliveries are much more complex than receiving a box on the loading dock.

In some cases, services are delivered by suppliers without even being ordered. For example, after a storm knocks down trees onto power lines, the supplier responsible for that geography hauls away the trees and sends the electric utility an itemized invoice that must be approved, validated and reconciled to the contract.

Goods-focused procurement practices and software packages fall woefully short of being able to handle most services, which is why services purchases remain so under-managed in many large enterprises.

Increasing Control and Value of Outside Services
A new category of procurement solutions, designed specifically for services procurement, can address the complexities surrounding services. When combined with a best-practices services procurement program, these solutions can deliver substantial cost savings, higher-quality services delivered, and full visibility and control over spending.

Gaining these improved results requires several key elements in the services procurement program:

  • End-to-end process: Improving just one part of the process - sourcing, procurement controls or payment reconciliation - yields a small fraction of the benefits of addressing the entire process, and often doesn't generate the anticipated benefits even within the improved area.


  • Category-specific planning and rollout: Each services category, such as marketing, contract workers and professional services, should have its own tailored approach to the supplier marketplace, requisition definition, deliverable processing and payment approvals.


  • Procurement discipline, local control: A consistent process, implemented worldwide, is necessary to obtain control and visibility into all spending for a services category. The requisition and approval processes should be handled locally to ensure that the on-the-ground manager decides on the vendor, the requisition requirements and acceptable deliverables.


  • Change management: Many players have a vested interest in the status quo. Examples are the vendors who gain favored relationships and charge non-competitive pricing, the managers who want to order services in the easiest way possible, and the executives who want control over their business processes. Change management, starting with early input from the key constituents regarding process design and implementation, is a key element of success to both improving results of the services delivered and gaining the benefits of managing services procurement.


Trends to Services Procurement
Several trends are driving increases in outside services spending:

  • Companies increasing focus on their core competencies and outsourcing noncore competency areas.
  • The ongoing reduction in transaction costs from improved communications and collaboration technologies globally.
  • The fact that services are inherently inflationary due to their high hourly labor content.


In fact, CAPS Research projects that procured services will increase 13 percent per year for the next five years, or about four times as fast as the economy overall.

Proactively and completely managing services is imperative for every enterprise. Executives who seek to improve results from outside services, while reducing costs and risks, should select a global solution partner with the highest and fastest demonstrated total value of ownership, in order to drive the necessary change and deliver the compelling benefits of services procurement and spend management.

John F. Martin is Senior Vice President, Strategy & Technology at IQNavigator, which optimizes services procurement and spend management processes.