The article below is written by Stefan Becker on September 11, 2011
Does Procurement have the full control of external spend? Based on the findings of our 2010 survey the answer is uncertain. A mere 30% of the CPOs felt they had control of more than 80% of the external spend. Yet the landscape is ready for change and service Procurement has an important role to play:
- 74% of the respondents stated that Procurement is striving to increase the control over major spend categories – namely indirect materials and services – as they were traditionally not in the focus of Procurement but of functional or business based departments.
- Another 70% of participants highlighted that Procurement has recently taken control over important service spend categories such as marketing, travel, training, IT services, consulting, etc. Most CPOs highlighted that their top management is expecting them – and supporting them – to continue this process in order to explore further benefit areas for an organization in these service based category areas.
- A further 74% tend to professionalize service Procurement through the implementation of traditional category management and strategic Procurement processes for service categories. The target is set, but can the implementation follow the same way as product and material Procurement? This article addresses the main success factors in the Procurement of complex services.
Specifics of service Procurement
Purchasing services are more complex due to the underlying characteristics. Services as we know are typically heterogeneous and are often difficult to measure and dynamic in nature. These specifics make it very difficult to control and evaluate the received service, and thus increase the perceived risk for Procurement. The production and consumption of services are mutually exclusive, implying that the buying company is both the consumer & co-producer and cannot store services as a result. This makes a clear specification of the service prior to purchasing more crucial but also complex, and highlights how closely connected the selection of a vendor is to the postpurchase quality evaluation. Finally, services are delivered in interactions between representatives of the service provider and the buying company and are consequently difficult to produce with consistent characteristics and quality. This further complicates the process of standardizing, counting and valuing them, and requires an assessment of the interaction process by various stakeholders – often too many to involve for a straightforward Procurement sourcing plan. Together, the intricacies of service based categories often imply that a greater performance ambiguity is very likely. However, this should not be a reason for discouragement, as there are proven and tested ways to overcome these difficulties in the purchasing and delivery of services. Figure 1 illustrates the two phases of service demand and service delivery. The successful measures to achieving this are described below.
Figure 1: Service Procurement phases and components
Procurement as a partner in strategic sourcing
To improve the quality and prices of services ordered from suppliers, Procurement should seek to position itself as a partner of the consumer. It is important for Procurement to support the consumer throughout the entire Procurement process as well as during the provision of service;
1. Early involvement
Procurement gains a significantly higher level of autonomy in demonstrating improvements through early involvement as requirements are being defined. As a result, the opportunity exists to identify appropriate suppliers up front, offer the consumers an appropriate list and volume of capable service providers and thus ensure competition during tendering. Taking into account the scope of Procurement, the Procurement department can advise consumers to limit or avoid additional costs by specifying the desired services completely and precisely; ideally describing possible variants as appropriate and where possible. The service specification and, in particular, the close integration of the wider business stakeholders in its definition are particularly important during the tender phase. Specification is necessary in order to develop a clear requirements model for the service providers and thus contribute to improving the quality of the provided services. The integration should ideally take place through crossfunctional teams (i.e. comprising members from Procurement and functional departments), which organize and describe the required services using defined standard service catalogues by scope, type, and amount of the individual items.
2. Service specification
When specifying the service, Procurement should ensure that applicable industry norms and standards are applied or are drawn on, e.g. VOB, GAEB, DIN SPEC 1041 in Germany. Wherever specifications are unavailable or inadequate, buyers and technical experts should derive specifications by breaking down the service delivery process or the deliverables themselves into individual items, identifying price drivers and hidden costs. This directly helps to separate standard service items from individual or highly customized items and to leverage saving potentials. Standard service specifications ensure the transparency and comparability of services. If difficulties continue to exist in relation to the service specification, it is possible to make use of the service provider’s creativity and knowledge in specifying services. Unlike with clearly prescribed specifications, in this case a description of the desired deliverables by the procuring company plays an important role. By using standard service specifications, purchasing can guide requestors to preferred vendors or also involve more cost-efficient providers in the tendering phase.
3. Contractual design
It is always important to test the services before using them at the procuring company. This can be organized through contractually defined testing phases lasting several months, after which the procuring company has the option of ending the contract prematurely. For individual services (e.g. marketing, fleet management, IT maintenance) a team of the procuring company can involve through management support the service provider and inspect the quality of the required services before they are contracted. During tender preparation, Procurement should seek to advise the consumers in designing the contract, i.e. selection of contractual alternatives such as time and material, service with fixed price components, purely fixed price contracts or hybrid forms depending on the service packages. Finally, it helps to define the scope of services, the expected level of quality as well as the selection of key performance indicators.
4. Tender management
During the actual tender, Procurement supports consumers in compliance related topics and manages the end-to-end process. This includes creating, releasing and sending the tender documents and publishing it on the purchasing portal of the company (where available). Purchasing collects and responds to clarifications and ensures services providers are informed equally during the entire process. In terms of provider selection, Procurement ensures a criteria-based functional and commercial assessment of all offers and the comprehensive preparation of negotiations, safeguarding that all relevant points are clearly addressed and become part of the contractual agreement. Once the contract is signed, Procurement assists the business department in the vendor transition activity, in order to provide all necessary and relevant information for a smooth start to service provision.
To control service spend effectively, Procurement must engage regularly with the functional departments from an early stage of the sourcing process. As a business partner it ensures that the required services are specified in service catalogues to identify capable suppliers. Furthermore, Procurement advises with regard to contractual design and pricing structures and facilitates the tendering process by handling compliance topics, compiling and distributing tender documents and finally guaranteeing a structured and transparent bid evaluation.