Unravelling the services procurement puzzle

Complex services present particular challenges for procurement but they can be overcome says Mark Whitehead.

The business of procurement is about defining what the purchaser wants and then finding a supplier who can supply it at the right price, on time and to the required quality standards. That's challenging enough with simple commodities such as desks and stationary. But when it comes to the complex procurement of services, important aspects of a professional purchasing approach specification, tendering, sourcing, contract and supplier performance management - can appear impossible.

Research shows that spending on services (marketing, consultancy, contract labour, facilities management, travel, print and other categories that involve people doing things rather than simple objects or materials) is the most difficult to control, yet one of the largest potential opportunities for savings. In fact, many purchasing directors simply don't know how much their organisations spend on services. And many have little control over the spending they do know about.

What's more, in a large number of companies purchasing directors often hugely underestimate how much their organisations are actually spending in these areas. As a key element of corporate expenditure, services are much more significant than many professional purchasers seem to realise.

Nevertheless, recent studies in Europe suggest that purchasing directors increasingly understand the importance of services as a spend category. Having tackled the simpler 'hard' or direct goods, the big challenge for many organisations now is to bring services procurement under the professional purchasing banner.

The size of the challenge will vary according to the sector involved and the particular organisation. The volume of spending varies enormously: it is estimated to account for as much as 85 per cent or more of total spending at financial services firms, for example. Other sectors in which spending on services is high, include technology, education and the public sector. By comparison, more traditional sectors, including manufacturing and telecommunications, typically spend as little as 10 per cent to 20 per cent or less of revenues on services.

Even at the lowest levels, though, gaining control of the spend is crucial in a competitive organisation. As with any purchasing, the first challenge with services is to gain hard information about how much is being spent and with which suppliers - the visibility. New solution providers in Europe are currently offering a range of services procurement tools to help accomplish this.

Stage two is to bring spending under the control of both purchasing and the relevant professionals, and to ensure that maximum value for money is being achieved. This stage is more complex and involves departments working together to share knowledge and implement processes. There is, therefore, some way to go before the utopia of control over services procurement is reached indirect spending.

Yet procurement departments were not involved in as much as half of this spending. Another study by procurement vendors, Ariba and the London Business School, underlined just how challenging the current state of affairs is in many organisations.

A recent survey of large European companies identified several black holes into which corporate cash was disappearing. Heads of procurement estimated that, on average, their departments had visibility of only 50 per cent of spend on hard goods such as capital and office equipment, office supplies and IT equipment. But by far the worst black hole, the survey found, was the one into which spending on services - consultancy, facilities management, travel and print - was disappearing without trace. Broadly confirming Aberdeen Group’s findings, in the Ariba study procurement bosses estimated they had visibility of only 43 per cent of spending.

There seems to be general confusion about how much is spent in service categories. Research has shown that companies typically devote about 60 per cent of their spend to services. Yet, according to the Ariba study, procurement directors estimated that services spend represented on average only 15 per cent to 20 per cent of the total. This disparity suggests that a huge branch of service category expenditure was 'not on procurement's radar at all,' as suggested by the survey.

The reasons for these problems are clear. Firstly, according to Ariba and the London Business School, services are more complex and difficult to price than goods. It's not difficult to visualise this: marketing, for example, involves many intangible activities. How do you price the creativity involved in coming up with an excellent advertising slogan? Investment in consultancy may be extremely worthwhile, but how do you measure it? Secondly, it is much more difficult to manage a services contract than the equivalent for hard goods.

At Abbey financial services, recently taken over by Spanish bank Santander, director of procurement Guy Allen says the key issue is to identify who is spending money in the organisation. Alien estimates that nearly 100 per cent of Abbeys spending is on services, depending on how it is defined. 'The key to success is to work out what your governance model is in each category,' he says. 'You have to understand who is making the sourcing decisions and how much they're allowed to do. You have to be able to control them, to make them not do what they're doing or at least do it in a way that's acceptable to your sourcing strategy.'

Allen, whose previous experience includes procurement at Ford trucks, says another challenge is quality control. 'With direct purchases like truck parts, you're buying the same thing year after year in huge volumes to a specification that barely changes. But when you're buying the services of individuals, what you get will vary hugely. You can have a very clear specification for cleaning, for example, but the delivery is often difficult to regulate. Likewise, in consultancy the performance of individuals is very variable. Each category requires a totally different procurement approach.'

Another crucial success factor in tackling services spending is to bave support at board level, he says. 'You need a burning desire at senior level to do something about it. You need someone to say, "I don't believe we can be spending this much on this category and I don't want us to do it any more." You need the CEO to say, "We're going to do procurement better.''

Allen's approach at Abbey appears to be paying off. A target of saving 9 per cent of spending over three years - that is £71 million on a total of about £81 0 million - has been met. Savings in individual categories have typically been between 15 per cent and 30 per cent. Companies increasingly accept that they must bring services spending under control and, though they face huge challenges in doing so, there are steps they can take. Even more than for simple goods, it is essential for procurement professionals to gain credibility with their internal customers and to develop good working relationships. This is especially true ot: for example, marketing, where the nature of the services being sourced is in many ways difficult to analyse precisely.

Graham McKay, EMEA sourcing manager for marketing at Motorola, who controls a budget of $150 million to $200 million a year, believes it is essential for procurement to sell itself to the marketing department, because this is an area where there has traditionally been little involvement. 'The biggest challenge has been persuading the internal clients that procurement has something to offer,' he says. 'You have to convince them that there is genuine expertise in the procurement function, and that it's materially worthwhile getting procurement involved. Marketers want to know what you know about what they do.'

Marketing is to a large extent subjective, McKay says. 'One of the buzz words you hear from marketers is "chemistry". It's all about finding people who understand your brand and your business objectives. It's an area where the relationship between the supplier and the client is often very close. People talk to each other on a daily basis and develop good personal working relationships. They're working around perceptions and ideas rather than  something tangible. This is one of the last areas where procurement has been able to secure a foothold.

Measuring procurement's success is an important part of persuading others that it has produced results. Fortunately, there are some metrics available, says McKay. Procurement can make a difference by making sure a tendering process is conducted fairly, for example. And once a relationship has been entered into, procurement can monitor it so that the business as a whole can see that it's worthwhile.

Alf Noto, vice president of operating resource sourcing at Nokia, launched a major initiative three years ago to tackle their services spending. It involved a substantial transformation of the procurement function, developing a detailed method of analysing savings and a trebling in the sourcing work force to take on the challenge.

But Noto is quick to point out that while visibility of spend is crucial, organising procurement in the services arena in the right way is even more important. Direct spend on goods often operates in a highly consolidated and often global supplier market, he says. But services providers, even if they appear global, are in reality usually regional or local. And the people in an organisation who are using the services are often very widely dispersed, making tracking of spending difficult.

So the most urgent need in tackling services spend is to ensure the procurement professionals in the buying organisation are organised in a way that reflects the marketplace, and that they are closely in touch with internal stakeholders. 'In the area of services, many suppliers aren't able to act globally so you have to adjust your organisation accordingly if you're going to get maximum value for your organisation,' says Noto.

'The key is to put high-quality people physically close to the local and regional supply market and the internal stakeholders. You can have complete visibility, but if you don't organise your procurement operation to reflect the supplier market, you won't achieve anything.’