What is services procurement?

Services Procurement is a process for buying and managing complex service categories. Unlike procuring physical goods, buying services is usually less centralized within a corporation and relies on a completely different supply chain than physical goods. Most importantly, services procurement involves the legal, cultural, and organizational complexities associated with budgeting, evaluating, and engaging project-based talent—consultants—and services from a third-party supplier through a statement of work (SOW) contract.

SOW contracts define agreed-upon engagement or project terms and conditions, which usually include financial agreements for issuing payment when deliverables or milestones are completed, as well as rates and stipulations for billable time and expenses. Services can range from highly skilled consultants to non-core competency business functions. Some common services procurement models are information technology (IT) projects, marketing services, legal services, financial and tax services, call centers, claims processing, management consulting, and offshore projects, just to name a few. The evolution of the marketplace is now demanding that project-based talent have the same type of visibility and control that organizations experience with their contingent talent.

In most organizations, services are outsourced daily by various business units, but the process is not effectively managed from start to finish. Mitigating risk from a highly decentralized management process creates numerous inefficiencies, driving up costs and creating potential compliance issues.

In fact, according to The Aberdeen Group, 60% of companies profess that SOW-based projects and services received the most organizational attention over the past year, yet a mere 14% of companies have high visibility into their SOW-based spend.

The difference between services procurement and contingent staffing

There are a number of pain points, affecting procurement, legal and finance, human resources, individual managers, and executives that hinder successful management of services procurement. Why does this happen? A key disruption factor is that consultancy and strategic outsourcing are sometimes intermingled with contingent staffing (also called professional staffing or temporary staffing), an entirely different spend category. The management of SOW engagements is dramatically different than that of contingent staffing.

In a SOW engagement, the manager’s priority is to ensure an outcome is met by meeting the terms of the agreed-upon SOW, rather than managing or evaluating the individuals who complete the tasks. Take the example of a company who may or may not have an internal marketing function but chooses to outsource a marketing project to an expert supplier. As long as the milestones and deliverables are met – designs completed and approved, collateral delivered, acceptance criteria met – payment is scheduled to the supplier. The corporation is not involved with selecting or evaluating the specific individuals who perform the tasks.

In contrast, contingent staffing consists of hiring non-employee workers to augment existing staff. Contingent labor is acquired from a third-party staffing supplier at a fixed rate per labor hour, and is typically used in situations such as clerical, light industrial, administrative, IT contractors and other temporary functions.

For example, reusing the marketing concept, a corporation who has an internal marketing function may open a new contingent position for a marketing specialist to assist a marketing team for a limited period of time. In this scenario, a candidate who is interviewed and screened fulfills the position temporarily. The manager is concerned with how well the individual is performing, manages and evaluates the worker, and instructs them on their job responsibilities. The contingent worker reports their hours worked, and the supplier is paid on a regular schedule based on the worker’s hours.

Today, the lines between the two have become blurred, causing confusion in hiring and management. However, by clearly identifying and managing services procurement spend, companies can truly maximize organizational profits and mitigate risks.

The importance of visibility into company spend

A procurement department typically manages multiple spend categories tied to different functional areas such as marketing, IT or legal, with multiple active projects under each spend category. Organizations that are not effectively gaining visibility or control of their extended workforce spend often are unable to answer questions like:

• What is the sourcing process being used?
• Is the procurement organization providing value through competitive sourcing, or is the manager obtaining contracts on his or her own, e.g., reaching out to “friends?”
• Are contracts based on approved company policy, or do the contract terms favor the suppliers?
• Does the contract indemnify the company in the right places?
• How many active projects are going on within each spend category?
• Do managers know who is working on these projects? Is their access to company
• facilities, networks, data, and intellectual property appropriate and necessary for the work they are performing?
• Do managers know if their projects are being delivered on time? Within scope? Within budget?
• Are they being paid with discounts?
• Are they being paid based on the deliverables being met or the hours worked?

The lack of visibility into these variables poses a significant risk. If engagements are being sole-sourced without a bidding process, for example, it not only reduces the organization’s ability to garner potential cost savings but also hinders innovation and progress. Managers typically lack the sourcing best practices and negotiation skills of a procurement team. By avoiding the procurement process, they are hindering the opportunity to secure the most cost-effective suppliers and obtain the best value.

The need for operational efficiency and quality

Services procurement also addresses issues of operational efficiency and quality. Time is money. A more efficient process can help reduce costs and minimize delays. Efficiency is also increased by transforming from sole-sourced to competitively bid engagements, which drive innovation, break up the buddy system, and obtain the best solution at the best price. In addition, if a deal is being renegotiated, procurement teams can see how many changes are made and if there are patterns to changes to determine how well the project is being scoped for initial budgeting. This can avoid a supplier’s initial underbidding simply to win the project, followed by subsequent changes that continually raise the price, under the definition of “scope creep.”

Managers need an organized system to track milestone completion and acceptance, resource time and hours, and expenses associated with a project to determine the number of consultants who have worked and, in turn, validate invoices. A manual process is tedious and time-consuming and, as a result, often ignored.

Executives cannot rely on vendor reports to gauge performance and effectiveness. Rather, they need access to internal benchmarking data to gauge the quality of the supplier’s work and help make decisions that drive the company in the right direction vis-à-vis what projects to implement going forward  and with whom.

Maximizing cost savings

For many organizations, one of the most readily apparent impacts of managing services procurement is the cost savings potential. According to Forrester Research, companies that deploy a services procurement management solution can achieve positive ROI in less than one year, and realistically expect to reduce costs by 5% to 10% by using a tool that automates, centralizes, and reports on the services procurement process. Common cost reductions come from better rate negotiations, volume discounts, and early payment arrangements.

Services procurement is at a tipping point because of the sheer fact that it constitutes a significant percentage of an organization’s total spend. Research from the Aberdeen Group shows that users of vendor management systems (VMS) are 21% more likely to have the ability to track (in real-time) expenses and costs related to SOW-based projects, compared to those who do not have a system in place. The right technology tools can boost an organization’s ability to achieve cost savings, not to mention having a centralized approach to gain better visibility, tracking capabilities and risk mitigation.

The vital role of centralization in both domestic and multinational organizations

As companies realize the risks incurred when there is a lack of visibility over a contingent workforce that is scattered across disparate locations, they recognize the value of centralizing the information into one system that eliminates all forms of manual tracking.

For example, a project of $1 million or more may go through a competitive bidding process and obtain a purchase order (PO). But using a PO generation system or ERP does not track the progress nor outcome of the project itself. Liken it to obtaining a PO to purchase one million pencils at $1 each. One does not track the subsequent path of the pencils. They are simply purchased and used throughout an enterprise. But when a company purchases a $1 million project with workers who have service deliverables, it is mandatory to track whether or not the desired outcome is achieved, where those people are located, how they gain access into the company’s brick and mortar buildings, and what systems they are privy. Such tracking does not occur with PO generation systems or ERP systems.

Centralization also is vital for monitoring those projects that run under $500,000. Often, companies are not aware if these smaller scale projects are competitively sourced, but the costs can quickly add up and surpass the $1 million threshold of expenses to manage.

It is important to keep in mind that services procurement extends around the world. In many countries across Europe, services procurement is legislatively less imposing on the business, protecting companies from laws and regulations pertaining to hiring extended workers. And the nuances vary by country.

When multinational companies grow by acquisition, part of the integration process involves merging different systems and business processes in addition to learning how to comply with different laws, regulations, business practices and cultures. It is imperative, then, that multinational companies have a single system of record for capturing all their services procurement spend, potentially from disparate systems and processes, with the ability to support unique business processes, contract languages, terms and conditions, pricing models, and deal structures within different countries, while providing a centralized view into spend overall.

Centralized visibility into services procurement spend across an entire enterprise, whether domestic or multinational, gives company executives a laser-focused view into the organization and the ability to make informed decisions, develop target forecasts, and approve project funding.

The value of managing services procurement effectively

Managing services procurement effectively can achieve innumerable benefits, foremost among them the ability to contribute to corporate growth. With the right solution in place, proper management can move an organization forward dramatically. Effective solutions are designed to tackle the needs of enterprises by centrally collecting all data related to a company’s non-employee workforce, including but not limited to pay, date of hire, location, project, and supplier, and providing real-time analysis of a project from any place at any time.

Some of the major benefits of a full-featured services procurement solution include:

• Strict compliance gives companies the ability to enforce their policies and standards to mitigate risk and exposure through a rules-based system.
• Clear visibility enables companies to view and monitor all aspects of the services procurement lifecycle. Managers can then make quicker, fact-based decisions based on actionable information. For example, if a manager is no longer active on a project, the system will alert the user to deactivate the manager so he or she no longer has access.
• Efficiency through reduced cycle times allows managers to focus on their projects and not the process. This helps minimize delays and reduce costs.
• Cost savings are achieved by consolidating service spending across projects.
• Generating quality metrics on consultants, milestones, vendors, and projects throughout the entire services procurement lifecycle helps ensure better quality, so managers can do their best work.

The rewards can be extraordinary. Companies that effectively manage their service procurement labor can gain transparency into their service spend and experience the benefits of cost savings, regulatory and policy compliance, and have the best talent on board to lead innovation. The bottom line? Services procurement helps companies drive corporate value and gain a competitive advantage in the global services economy.