Ariba's Supply Watch Road Show — Part Two: Services and Indirect Spend

I really enjoyed Justin Falgione's presentation last week at Ariba's Supply Watch road show. During it, he was a completely objective analyst. In fact, Justin even endorsed Fieldglass, a services lifecycle spend management vendor, who has some competitive overlap with Ariba, in part of his pitch. But in particular, Justin's advice on how to bid out the lawyers and reduce legal spend was the most valuable component of his talk. On a personal level, I'd go as far as to say that as sourcing professionals, it's our moral, ethical, and spiritual obligation to make sure that lawyers -- which are certainly valuable to some degree, but a huge drain on commerce in the broader scheme of things -- see less of the overall GDP pie each year.

But I digress. At the start of his chat, Justin shared that the top services spend categories at Ariba of late have been -- in descending order of volume -- facilities services, site MRO, contract labor, office products, marketing collateral, travel, financial services, professional services, and number of HR areas. He expects an uptick in volume for professional services, marketing and HR in the coming year.

Justin suggested a number of reasons for addressing services spend categories today. First, the current uptick in the economy correlates to an increase in spending in services categories such as marketing, recruiting, temporary labor. Second, SOX requirements regarding content and authorization of significant spend items now require companies to address services spend control. Third, the EPS implications of addressing services spend are significant. Combine this last point with the fact that many companies have already leveraged technology and processes to reduce their cost of operations and other categories, and you get a recipe for going after services spend next. Last, the labor content from services has evolved to lower cost resources from the use of “para”-professionals to offshore resources (which opens up the door to capture back some of the added margin on the sourcing side).

Throughout the rest of his pitch, Justin went through a number of category strategies and trends in such areas as plant MRO and contingent labor. While this was all well presented and fascinating stuff, I must get back to Justin's advice at how best to reduce the lawyer's take (you can tell I'm obsessed by this, can't you). Here, Justin suggests categorizing "routine" legal spend versus specialized, and not just reverse auctioning the hourly rate for the routine areas -- which can lead to 10-35% "identified" savings -- but really taking a strategic look at the overall legal spend picture. Then, it's possible to find the right tier of firm for the right type of work (e.g., it's better to pay $150 an hour to a local associate at a small firm to do basic contract work than to pay a partner of a global firm twice the amount even at a 30% discount off of her standard rates).

For the routine stuff, Justin suggests maintaining 2-4 firms for standard legal services as well as proposing alternative fee arrangements across the board (not to mention implementing electronic billing and invoicing, which can lead to material additional savings). Despite the savings to be had from alternative fee arrangements, Justin referred to the fact that 85-90% of legal bills are still by the hour. However, moving to contingent fee structures, pre-negotiated results-based fees and flat fees per-task can lead to even greater savings and legal spend cost reduction. So don't "kill all the lawyers" as Shakespeare suggested once upon a time. Just clip their fees through smart sourcing and make them downgrade to an E-class from an S-600.

Jason Busch

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