In today's economy, most enterprises have gone through waves of cost reductions and activity rationalization. With the current uncertain economic climate -- the lack of a strong recovery and little revenue growth -- additional cost savings are needed to improve profitability, and in some cases are mandated by top-down cost reduction targets.

While people-based services spending can be reduced by canceling outsourced projects and reducing contractors and temporary employees, beyond that services costs are usually viewed as non-compressible.

However, enterprises in many industries have been able to significantly and unexpectedly reduce costs through services procurement solutions, generating considerable profit improvement and additional shareholder value while continuing the same projects and personnel levels.

Services Spending -- Large, Under-Managed and Costly

A study by the Center for Advanced Purchasing Studies (CAPS) Research found that services spending was 58 percent larger than spending on indirect goods, and averaged almost 15 percent of revenue for the organizations studied.

While procurement of many goods (both direct and indirect goods) has already been automated and centralized, services spending has not been automated or controlled in most enterprises - the CAPS study found that only 21 percent of services spending was processed by enterprise resource planning (ERP) or e-procurement systems.

The study also determined that with services spending, there are typically more supplier relationships to manage, higher off-contract and uncontrolled spend, and less involvement by the purchasing group - leading to higher prices, inefficient and inconsistent processes, and lower budget control and spending visibility.

CFOs have already begun to realize the challenge and opportunity of managing services spending more closely. CFOs surveyed by Forrester Research estimated that streamlining procurement practices could cut services spending by an average of nearly 10 percent, which equates to almost $100M in annual profit improvement at the typical Global 2000 enterprise.

In addition, today's trends of focusing on core competencies and outsourcing other work, especially to offshore providers, increases the need for accountability and close tracking of ongoing services deliverables.

Services' Complex Procurement Requirements

Unfortunately, existing e-procurement and other goods-focused procurement solutions cannot sufficiently automate end-to-end services procurement and spending processes. Services procurement differs substantially from goods procurement in several critical aspects. These include:

* No "catalog" for services: Specifying services requires case-by-case requisitions -- there is no "part number" for a project or set of contractor skills.

* More complex procurement process: The procurement process for services can involve ongoing collaboration to refine requisitions, custom proposals, candidate interviews and ratings, and deliverable requirements for items such as software applications and marketing materials; few of these can be handled by catalog-based procurement systems.

* Ongoing services delivery and billing: Services require ongoing progress tracking that determine billing for each cycle. Time and expense reporting, approvals, variable billing calculation, and reconciliation with timecards cannot be managed with goods-based procurement systems.

* Contract compliance: Ongoing services billing also must satisfy contract terms such as billing rates by skill set, overtime and shift calculations, service level standards, and case-by-case invoice calculations. In addition, order revisions are often made, such as project scope changes or contractor extensions, and these must be reprocessed through approvals and contract acceptance.

Because of these specialized processes, services procurement and spend management are typically not automated, managed, controlled, or centrally visible in most organizations. As a result, a large cost-savings opportunity -- larger than potential savings on indirect spending -- is left on the table.

Services' Growing Strategic Importance

Labor-based services especially are much more strategic to enterprises than indirect goods or commodity services. As examples, outsourced IT or strategic projects can drive significant value for the enterprise, and the skill sets of temporary workforce skills are an essential and growing part of the enterprise's overall human capital. Enterprises are increasingly turning to contractors and temporary workers to maintain cost structure flexibility, utilizing roughly twice as many temporary workers today vs. 1990 according to the American Staffing Association.

In addition, labor-based services are inherently inflationary, rising as hourly wages and benefits rise, as opposed to most goods and capital-intensive services. As a result, labor-based services will continually become a larger part of external spending, increasing the need to actively manage and control these expenses.

Capturing Savings in Services Spending

Many companies are already achieving significant cost savings in services spending by implementing an end-to-end supplier, procurement and spend management solution, creating several types of cost savings. These include:

* Direct cost savings: When contractor requisitions and project proposals are put out to bid to pre-qualified suppliers who compete directly for the business, enterprises have seen between five and 20 percent rate reductions versus the usual method of calling a few known suppliers or by working with an exclusive supplier.

* Discounts: Existing discounts are better leveraged and, by having complete and accurate spending information, additional discounts can be negotiated such as volume and early-pay discounts.

* Process efficiencies: Typical services procurement and spend management processes are typically paper-based and manual -- using emails, faxes, paper timecards and approvals, and manual invoice reconciliation. By automating these processes, enterprises have reduced administrative time and costs more than 70 percent and payment cycle time up to 80 percent.

* Contract compliance: Ensuring contract compliance and avoiding overpayments can result in up to a five percent spending reduction, since manually processing hundreds of paper bills every week can lead to overpayment from missed discounts, spending beyond budget limits, duplicate time cards, and keeping contractors past their planned end dates. In addition, on average, over 30 percent of services are not covered by standard contracts, which leads to less desirable terms and rates.

Together, capturing all these savings can lead to cost reductions of 10 to 35 percent of services spending for enterprises. A best-practices program automates and centralizes the process for sourcing and managing services spending, while maintaining the independence of individual managers making their procurement decisions.

Cost Savings Example -- Contingent Workforce Spending

In particular, hard-dollar cost savings for the contingent workforce services spending category, which consists of contractors and temporary employees, are especially compelling because of the high degree of associated savings:

* Bill rate reductions due to competitive bidding and normalizing rates for similar skill requirements across departments.

* Additional discounts specific to this spending category such as tenure discounts, overtime discounts, and withholding recovery discounts.

* Compliance savings from preventing duplicate time cards or invoices, ensuring only approved timecards are invoiced, and ensuring that all discounts are applied.

Additionally, process savings can be significant, such as accounts payable, which today must manually process and reconcile hundreds of invoices each week. This work can instead be handled by an automated spend management solution that generates a consolidated electronic invoice.

Achieving these benefits for all categories -- contingent workforce and other outside services -- requires a coordinated implementation program with software, new processes based on best practices, change management, and continual improvements.

Applying Strategic Sourcing to Services

While immediate services spending savings are achieved from competitive bidding and applying appropriate discounts, enterprises also gain by applying strategic sourcing principles to further increase savings, spending control, and process consistency.

The same expertise that was utilized for direct and indirect goods procurement can now be applied to services. With complete and accurate spending information, business analytics create report cards for suppliers, allowing spending to be consolidated and terms renegotiated with the best suppliers.

In addition, demand can be managed more closely. By providing clear visibility into what services are being procured and what deliverables are being attained, spending can be both minimized and aligned with the organization's goals.

Vendor Neutrality -- The Key to Sustainable Profit

Achieving initial and ongoing cost reductions requires optimizing every requisition -- specifying the services needed, distributing the requisition to the appropriate pre-qualified suppliers, and allowing them to bid competitively for the opportunity. Many enterprises today have semi-exclusive arrangements for some services that hamper their ability to attain the best services for the best price on every requisition.

In addition, the high-quality vendors welcome participating in a vendor-neutral marketplace since they gain substantial benefits when they compete on a level playing field -- reduced sales expenses, lower bidding costs, faster payment with far fewer disputes, and increased revenue through receiving all requisitions.

Increasing Profits and Shareholder Value

Procurement savings fall directly to the bottom line, since the same goods and services are being purchased for a lower cost. These bottom-line profit improvements directly impact shareholder value, as the enterprise is accomplishing the same activities for less cost.

Automating and gaining control over this under-managed spending category can quickly and substantially increase profits and shareholder value.

Additional Benefits

Beyond the cost savings that directly improve profits and shareholder value, additional benefits have been achieved by enterprises through process automation and spend visibility. These include:

* Risk management: Many legal exposure risks can be more closely managed especially for onsite services, such as security risks, co-employment risk, and labor law compliance.

* Reduced services overlap: With the visibility into services spending, overlapping projects or contingent workforce efforts can often be found and resolved, further lowering spending.

* Strategic sourcing: As supplier performance is tracked, more business can be directed to the suppliers that have the best quality and prices, achieving additional volume discounts and negotiating higher service levels from the best suppliers.

* Speed: Time to hire a contingent worker or source a project is typically reduced by over 50 percent, allowing the enterprise to move more quickly.

* Spending control and alignment: Spending growth can be managed deliberately and aligned with strategic priorities through ongoing visibility and monitoring.

Over time, these additional benefits often generate as much value to the enterprise as the initial cost savings. The accurate and complete spending information from the system is leveraged to increase agility, alignment and control of services spending.

Significant near-term cost savings are available by managing services procurement -- a large and under-managed spending category that is much bigger than indirect goods and is much more critical to strategic execution.

Through fast implementations with no up-front technology costs, low ongoing costs, and proven bottom-line benefits, a services procurement solution and best-practices program can generate payback periods of a few weeks and as much as five-digit ROIs.

Each group within an organization benefits -- finance gets spend visibility and control, accounting avoids ongoing reconciliation and payment burdens, purchasing achieves reduced negotiated rates and spending process control, hiring managers gain faster turnaround and better quality services with no paper shuffling, sourcing attains improved supplier quality through monitoring and performance measurement, and IT avoids implementation and operations hassles and costs.

The quick and sustained cost savings from a best-of-breed solution and program translate directly into significant increases in profits and shareholder value. Simply implementing procurement best-practices into services, with a proven solution partner, can drive profitability up to 20 percent higher.

John F. Martin is IQNavigator's SVP for Strategy & Technology.