Arun Srinivasan, VP of Marketing & Strategy, Fieldglass, Inc.

The procurement practice has matured over the last 10-15 years to deliver tremendous value to the business through automation and process standardization. A major enabler of this maturity has been the sophistication of technology tools to manage various areas of procurement. According to Gartner Research:

“Procurement technologies were the only supply chain market to maintain growth from 2008 through 2011. Growth sustainability is a result of these technologies’ proven ability to drive savings and the fact that the applications making up the segment have matured to deliver on the promises they promote. SaaS, the primary delivery model for procurement technologies, plays a role in driving growth because it allows companies to access procurement technology even when there are constraints on IT resources, particularly since many types of procurement technologies deliver significant value as stand-alone solutions” (Gartner, Market Snapshot: Supply Chain Management Software, Worldwide, 2011).

Within the categories managed by procurement, services procurement in particular has presented one of the largest opportunities for savings, primarily over the last few years. Many large corporations are re-examining their processes to take advantage of new opportunities, tools and techniques.

What’s driving the growth in services procurement?

Nearly a decade ago, as companies started focusing on managing services procurement, they adopted first generation solutions that accomplished two major tasks: to ensure that the appropriate contracts were in place for all vendors doing business with their company, and, secondly, to standardize the payment of these services. Together, these two functions make up the “book ends,” so to speak, of the procure-to-pay process. Formalizing the management of these particular areas was a standard market approach, resulting in solid benefits, including increased compliance and efficiency.

Ironically, for services (unlike goods), the tasks involved during the “in-between” phases – engagement and management of a contract – can drive the highest savings and benefits. The processes and transactions in between these “book ends” were not managed consistently, which, over time, led to a buildup of substantial unrealized benefits:

These constraints faced by first generation adopters are largely overcome by today’s (second generation) technologies and management tools. Second generation adopters are realizing significantly higher gains through four main benefits: cost savings, risk mitigation, increased process efficiency and improved service quality.

While the potential benefits are clear, there are a few common barriers to the adoption and implementation of services procurement programs within corporations:

• Fragmented ownership of procured services. Cumulatively, company-wide services spend is large, but the ownership tends to be fragmented across various categories, regions and divisions. This decentralization leads to challenges in driving a standardized process.
• Business user & vendor buy-in. Oftentimes engagement managers hesitate to adopt formal processes as they are concerned about losing flexibility to make purchasing decisions. Similarly, at the outset, vendors feel that standardization might threaten their relationships and expertise.
• Return On Investment (ROI) & funding model. In the past, the ultimate value, ROI timeline and funding to standardize services procurement were unclear, particularly as technologies, business models and management processes were still in their infancy.

Through today’s second generation technology and management models, the services procurement market is better defined and virtually all of these barriers can be overcome. Adoption rates for technologies like cloud-based Vendor Management Systems (VMSs), through which to manage services, are setting industry records. Some of the largest services procurement programs – upwards of $2 billion in annual services spend – have launched in the last 18 months.

Today’s renewed focus on services procurement is a result of:

• A strong emphasis on bottom line savings. Services spend has increased by an order of magnitude over the last 5-7 years in most corporations, due to the unstable economic climate, changing worker trends and the aging traditional workforce. The use of services and contingent labor in general now account for nearly 30 percent of the total U.S. workforce. Along with this increased usage comes an opportunity for greater savings.
• The maturation of services procurement technology. The cost and capabilities of traditional on-premise procurement technologies aren’t in line with market needs. Today’s easy-to-use services procurement solutions like VMS require little to no training, are collaborative in nature and are supportive of today’s distributed enterprise. As Software-as-a-Service (SaaS) is the predominant delivery model, these solutions are also IT-friendly, requiring no installation, maintenance and minimum to no investment.
• Evolving vendor partnership model. Procurement departments have transitioned from “managing” vendors and focusing only on lowering costs to building true partnerships with vendors to drive preferred pricing along with higher quality and reliable service providers.

What are some of the business drivers?

Throughout all phases of the procure-to-pay process, there are a variety of ways to derive cost savings, greater efficiencies and other benefits that contribute to the overall business goals. That said, it is unclear where exactly these opportunities lie. How can companies achieve additional savings and efficiencies throughout its services procurement processes? Here are some common themes that emerged across a myriad of services procurement programs in mid-to-large companies.

What’s the best approach to capturing services procurement value?

Once the business case for formalizing the management of services procurement is made, the next question that arises is often “what is the optimal path to capturing the value?” While the specific approach is unique to each organization and dependent on their needs, the diagram below captures the thought process often followed:

To implement a services procurement program, most organizations do so in phases, using a multi-dimensional approach to categorizing their services spend. Companies commonly look at their services in one of the following ways:

• Category-based (IT services, field services, marketing, light industrial, etc.)
• Nature of outsourced work (management consulting, BPO, Offshore, etc.)
• Vendor type (strategic vendors, niche vendors, Independent Contractors, etc.)

The key factor to recognize is that managing services procurement has evolved, and the attractive ROI offered by the market today has led early adopters to aggressively venture out to capture one of the last unrealized savings opportunities. Combined with sophisticated technologies and management processes, standardizing today’s services procurement programs is helping companies tap into a new opportunity for significant rewards.