Services e-procurement
Buying labour online
E-procurement is all very well for office supplies or computer equipment, but services throw up more complex challenges for both users and vendors
by Malcolm Wheatley (12/2005)
The Emperor has no clothes. That was the message with which Geoff Aldcroft, head of UK purchasing
at pharmaceuticals giant AstraZeneca, attracted attention with a critique of e-procurement practice at
the 2004 annual conference of the UK’s Chartered Institute of Purchasing and Supply. "What I was
saying,” recalls Aldcroft, "is that most of the activity in e-procurement was directed towards buying
‘things’, and there wasn’t a great deal of evidence concerning e-procurement’s ability to deal with
services, especially complex ones.”
Just weeks later, the difficulty highlighted by Aldcroft was starkly articulated in a report by analysts
Aberdeen Group. Despite services representing 30 to 50 per cent of indirect spending at many
companies, Aberdeen concluded that businesses faced "formidable challenges” in eliminating what it
saw as the waste and inefficiency that typically accompanied the predominantly manual purchasing
processes that were involved in obtaining business services.
The problem? As Aberdeen saw it, not only was the procurement of business services inherently more
complex – from both the purchasing life-cycle management process and cost model standpoints – but
also the purchasing of services was highly decentralised, typically being carried out by front-line
employees with little or no training in purchasing techniques. With few supplier negotiation skills, and
little governance oversight, these employees often paid premium prices.
If organisations have faced challenges when contemplating the e-procurement of services, software
providers have struggled to adapt the catalogue-based foundations upon which their solutions are
usually based. "Traditional e-procurement systems were not designed with the complexity of services
procurement in mind,” says Steve Savignano, CEO of Ketera Technologies, a so-called "third
generation” spend management vendor. "Services are based around contractual relationships, which
are not readily capable of being catalogued.”
Even so, that hasn’t deterred companies from putting services into their catalogues. As David Eakin,
professional services director at the London-based BuyIT Best Practice Network – and a former west
European purchasing director of Ericsson – points out, the creation of a catalogue helps to drive users
to preferred suppliers.
Sarbanes-Oxley and other changes to the regulatory environment are also acting as an impetus, adds
Gavin Herman, head of procurement for Europe, Asia-Pacific and Japan at investment bank Morgan
Stanley. Not only does e-procurement aid compliance from an administrative point of view, he points
out, but it also helps to enforce sourcing policies. Even something as basic as raising call-off orders
against a catalogue, in other words, can yield benefits.
Those benefits can only increase as solutions become more sophisticated. AstraZeneca’s Aldcroft, for
instance, today paints a more upbeat picture. "Ariba and other providers are now saying that their
platforms can be used for services procurement every bit as much as they can for physical goods,” he
notes. And in contrast to 2004, the claims now have sufficient weight for the pharmaceutical company
to be taking them seriously.
Indeed, Aldcroft – now programme director for AstraZeneca’s European purchasing programme,
responsible for securing procurement synergies across 16 European national sales subsidiaries – is
undertaking an evaluation of how well the company’s Ariba procurement platform can cope with the
purchase of services.
Trials with contract staff and consultancy services have worked – at least up to a point, he says. The
sticking point is moving beyond using the e-procurement platform as just a front-end requisitioning tool.
This calls for a richer way of describing the services that the company would like to procure, ideally
within a catalogue of structured working briefs from which particular assignments could be
commissioned. Although AstraZeneca’s present generation of Ariba software isn’t capable of this, the
next release apparently comes much closer, says Aldcroft. At which point, he adds, the e-procurement
of services such as conference organising or advertising campaigns is a real possibility.
It’s an optimism fully shared by William Northup, director of sourcing at US electrical component
manufacturer Hubbell Incorporated, which has been trialling Ariba’s latest software in its pre-release
"beta” version. One of the reasons why Hubbell signed up for the testing programme, he says, was to
gain early access to a richer descriptive environment.
Its key targets are travel, car rental, telecoms and freight – both road and ocean. While some of these
spend categories have never been looked at before, others have been tackled, albeit with earlier and
less service-capable versions of the software.
Level of complexity
But for e-procurement systems to truly be effective in dealing with the purchasing of services, not one
but several distinct issues need to be addressed, says Pierre Mitchell, a respected analyst who is now
head of the e-procurement practice at business process benchmarking company the Hackett Group.
"Compared to physical goods, services are much more abstract and bring a whole level of complexity
that isn’t seen in manufactured components and materials,” he says. "There’s no easy equivalent of an
‘item master’: the description is the service required, the unit quantity is either one or the dollar amount
involved.”
Comparison between competing service providers adds further complexity. With a standard description
– "legal services”, say, or "marketing campaign” – competing providers appear to offer identical
commodities, distinct only by fee-rate. In practice, of course, their capabilities and experience may
differ widely. More fundamentally still, the business value put at risk through using an inexperienced or
less-qualified service provider can be many times higher than any savings made through selecting
them over a more expensive provider, as contemplating a failed legal case or marketing campaign
amply illustrates.
Finally, notes Mitchell, there is the question of billing and payment. There’s no easy way to model how
services are actually consumed, delivered or paid for: time-based billing or milestone-based billing, for
example, both of which are common in the services field. "‘Drive-by’ sourcing events are one thing, but
procure-to-pay is where the rubber really hits the road,” says Mitchell. "Worse, procure-to-pay
automation is probably the biggest single challenge to service procurement, because it requires all
these other issues to have been resolved.”
In recent years, the purchase of contingent, or temporary, labour has been where companies
attempting greater e-procurement of services have focused their energies. "It’s always been the lowhanging
fruit,” says Mitchell. Why? Temporary labour is not only easy to describe ("We need some
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extra people on the factory floor this week, owing to demand levels, vacation or sickness”), but also
easy to quantify ("Fifty people this week and 75 the week after”) and relatively easy to reconcile and
pay for ("Forty-five people worked all week, five were off sick for a day”).
Even in manufacturing and distribution operations, where skilled workers are needed to operated
particular items of machinery, temporary labour can be deployed in low-skill or quickly acquired skill
areas such as packing lines, general labouring or materials handling. For greater granularity, add skills
to the service description: we need forklift truck drivers, road transport drivers, catering or janitorial
staff.
For Sony Electronics based in San Diego, California, the motivation behind its adoption of an eprocurement
system from IQNavigator in June 2002 was a combination of both improved sourcing and
a better procure-to-pay process, explains its director of corporate procurement, Walt Sindewald. Of the
two, the procure-to-pay process posed the bigger headache. The existing paper-based time-card
system meant that costs for temporary labour were not only difficult to reconcile – hundreds or even
thousands of workers at locations all over the US, including Sony retail outlets – but "lumpy”, with
irregular billing and payment patterns.
The sourcing decision was taken care of with the switch to a different agency, explains Sindewald. The
relationship with IQNavigator came about because the agency in question recommended it, prompting
Sony to forge a relationship with the company and begin using its tool not only to raise requisitions for
temporary labour, but also to reconcile the actual use of that labour, authorise payment and then
transfer the money. Almost at a stroke, says Sindewald, Sony’s procure-to-pay difficulties evaporated.
"The system is hooked up to time clocks, and as someone ‘badges-in’ or ‘badges-out’, it updates the
database.”
Although Sony has since switched temporary labour agencies again, it has continued its relationship
with IQNavigator, insisting that any subsequent agency uses it rather than introducing yet another
requisitioning and payment processing tool. "Agencies sometimes believe that they should control who
the software provider is, but one of the best decisions we’ve made was to have an independent
contract with IQNavigator,” he says.
Instead of having the records of its consumption of contingent labour spread across several systems
and databases, each relating to an engagement with a particular supplier, Sony now has a single block
of data going forward into the future. Just as importantly, it no longer needs to worry about the
introduction of any new systems that might be associated with a change in temporary labour agencies,
which (as agencies are well aware) act as a source of "stickiness”, making companies reluctant to
switch agencies in the first place.
It’s a rationale that, writ large, is arguably driving much of the direction in services e-procurement at
present. If you’ve got a system that you like, runs the argument, and which delivers the functionality
you want in respect of temporary labour, why not build on it and extend it to take care of the eprocurement
of other services? And, in the process, retain not only a familiar common core of
administrative processes, but also a body of data. Data that, what’s more, can play a critical part in
more effective sourcing.
Extract best value
As Farley Blackman, vice-president of indirect procurement and Six Sigma initiatives at the oil giant
BP, puts it: "Purchase decisions need to be made in a data-rich environment. To extract the best value
from the services marketplace, it’s essential to have appropriate systems in place to provide that data.”
At BP, he notes, e-procurement not only allows the company to access specific service markets
efficiently, but also provides a mechanism to force compliance from within the organisation.
Software vendors, too, have been quick to see the opportunity. Like IQNavigator, Elance’s roots lie in
the e-procurement of temporary labour and it is attempting to leverage that experience into other
service areas. Today, the e-procurement of temporary labour comprises just over 50 per cent of the
spend on services going through Elance’s system, asserts the company’s chief operating officer, Fabio
Rosati.
For both companies, their underlying pitch is persuasive: for a software provider with a background in
temporary labour, the e-procurement of services is less of a "brand stretch” than it might be for a
catalogue-based provider that has historically been focused on the e-procurement of physical objects.
Why? Because services, almost by definition, are forms of temporary labour, whether they involve
running an advertising campaign, organising a conference or conducting a lawsuit.
"You may be buying more on desired outcomes rather than for a specific duration, but ultimately
services are a form of temporary labour,” says Ron Jarman, global head of procurement at Reuters.
From the systems perspective, the knack lies in embracing all the various forms of sourcing, billing and
invoicing that are involved. This is arguably less of a leap for a system designed from the outset to
handle temporary labour, rather than physical goods.
In practice, however, the starting point adopted by both vendors has been with services that are as
close as possible to temporary labour in terms of parameters such as requisitioning, consuming and
billing. One large global sportswear manufacturer, for example, uses IQNavigator to staff IT projects
with computer programmers and other experts.
"With people services, project services and more complex services such as facilities management and
legal services, again and again clients have asked, ‘Why can’t we do these?’ and pretty much found
that they can,” says Brian Owens, IQNavigator’s senior vice-president of sales and marketing.
Part of the trick in doing so, notes Elance’s Rosati, is to recognise that services are multi-faceted in the
degree to which they lend themselves to e-procurement. "Every service has aspects that are simple or
straightforward, and aspects that are complex or more difficult,” he says. "If an aspect can be
categorised, it makes it much easier to define and then subsequently re-use. Are marketing services
more difficult to e-procure than contingent labour? Yes and no: a product launch is difficult, but a
mailshot is a much simpler proposition.” A granular, piecemeal approach, in other words, is much more
likely to pay dividends sooner.
In most businesses, services spend is huge, so optimisation is crucial. But compliance with legislative
requirements, human resources policies and procurement best practice is just as important. "The level
of maverick spending on services runs at twice the level of maverick spending on physical goods,”
claims Owens. End-to-end e-procurement provides an opportunity to capture maverick spending at
both the requisition and invoice stages – effectively doubling the chances of preventing it.
Services e-procurement may still be nascent, but it seems to have a highly promising future ahead of
it.
