In the past couple of weeks, it has been hard to discern the exact direction in which the global economy is headed. But despite the market swings we have seen, one thing is for sure. And that's the fact that in North America, there is still tremendous concern of a slowdown or outright recession in 2008. In late November, Goldman Sachs upped their percentage likelihood forecast of a recession in 2007 to 40-45% in fact (from 30%). For procurement, this has pretty significant implications. In a down market, I've already talked about the importance of investing in supply risk management, re-sourcing and more aggressively sourcing existing categories, and moving from fixed to variable cost structures. Today, I'll turn my attention to the need for companies to invest more in targeting services and non-production related spend categories.
When it comes to services procurement, I'm sure many of you have previously read the opinions of many bloggers -- including myself -- and analysts on the subject. And most of us who examine the area tend to agree that the market for services procurement is huge given its limited penetration to date. I've read estimates ranging from 10-25% penetration in the Global 2000, but even these numbers are skewed because most of these organizations that have deployed some type of services procurement solution are only proactively managing a handful -- at most -- of services spend categories. But better management of services procurement spend in a down market is even more important than in an up-market because rather than simply take a "slash and burn" approach to cutting services spending in challenging times, procurement organizations can be more selective in what to target and how to actually reduce their company's cost structures through managing third party services providers.
In a few cases I have observed over the years, some procurement organizations who have more aggressively embraced services spend have been able to expand their influence into sectors of the organizations which they had not been able to previously penetrate, not to mention creating new categories of spend to go after (because they were managed in-house by full-time or part-time employees in the past). In a down market, this is especially critical, given the important role procurement can play in helping reduced fixed operating cost structures for the business. But services procurement also matters in a down market because it can drive better cash management within a firm, enabling the payment of suppliers only when they achieve specific milestones and goals -- or bill a certain number of hours -- rather than when they choose to invoice.
The key in all of these rationales and examples -- not to mention many other reasons we could cite -- is looking at services spend categories holistically, rather than simply targeting them from a strategic sourcing perspective. Yes, better sourcing matters. But organizations that fail to implement processes and technologies to capture identified savings in specific services categories -- which are often impossible to manage effectively in traditional eProcurement or ERP system environments -- will be unable to realize the results they identify through better demand management and negotiation practices. Just as office supply and telecom providers quite often attempt to gain back lost margin points through taking advantage of compliance loopholes in the invoicing and payment areas, consultancies, facilities maintenance firms, temporary labor, and other services providers will inevitably look for ways to either directly or indirectly take advantage of clients that they know have limited means of tracking performance, milestones, job roles / grades and related thresholds to determine payment (and pricing levels).