Long Live Services Procurement! The World is Made Up of People, Not Widgets

With the announcement of the Fieldglass acquisition this week (see links to earlier coverage at the end of this post), SAP has clearly put its hat into the services procurement ring in about as serious a manner as possible. We’re incredibly excited for this move because we think it has the potential to give the buying and management of third-party services the attention it deserves. Now more than ever, services are what make the global economy go around. People matter more than ERP has ever cared to imagine (if it did at all) – until now.

Of course economists would argue that in the end, we all die anyway – and goods and consumables for that matter do as well. They get buried in landfills, recycled or just washed away with the years. But people make and change the world – and our businesses – into a better place. People drive innovation. And people are those who buy our own goods and services, not to mention those suppliers we purchase from as well – not the factories, companies or governments that they represent.

Moreover, in middle-income and high-income countries, services represent a significant portion of the overall economy. According to a World Bank study dating back nearly two decades, the services industry represented 66 percent of the economy in “high-income” countries and 52 percent in “low-income” countries. The numbers today are even more staggering. In 2012, services, as a percentage of GDP, represented 79.8 percent of the economy of France, 79.7 percent of the economy in the US, 78.3 percent of the economy in the UK, 71.4 percent of the economy in Japan and 71.1 percent of the economy in Germany.

Now getting back to my argument: it’s precisely these markets that buy the most software to run their businesses. Yet with the exception of HR systems, which represented 15 percent of overall “revenue share” of ERP and enterprise applications spending in 2007, according to AMR Research, the vast majority of spending is on financials and applications systems that focus almost entirely on the buying, production, inventorying and selling of goods, not services. Indeed, ERP spending is still approximately 50 percent of the total enterprise applications and financials spending pie today.

If we compare these numbers with the global trends highlighted in a recent Proxima and FTI consulting study that suggests companies are buying more than ever (on average 70 percent of an organization’s revenues are used to buy goods or services from suppliers, according to the report), then it becomes even more clear why the purchase and effective management of third-party services is so important. Yet to date, the vast majority of dollars and time invested by procurement organizations in talent, processes and technology has focused on approaches to better managing the acquisition of goods, not people.

This is going to change because it has to. And with its announced acquisition of Fieldglass, we have no doubt SAP recognizes this as well. It’s our belief that when the valuation and multiples of the deal come out, that the world will take this point much, much more seriously. Numbers talk, especially those that require debate about how to pay for such a deal if you’re a near $25 billion turnover company with roughly $10 billion in total current assets (cash/cash equivalents + receivables), as SAP is.

Without question, the buying, provision and management of third-party services must become a top competency of procurement organizations of tomorrow. And technology will become an even more integral component of this. Imagine today’s humble VMS evolving in importance to becoming the ERP of tomorrow.  It’s possible. And SAP knows this.

Such a shift is huge. Whether services buying involves the acquisition of temporary/contingent labor, independent contractors, consultancies, law firms, IT/cloud hosting services, marketing agencies or outsourcing, procurement organizations must go through a fundamental shift as they evolve from a mindset of “keeping the production line running, minimizing risk and negotiating” to tapping and unleashing third-party human capital and skills in ways thought unimaginable only a few decades ago.

This is a brave new procurement services order, one in which the UK government has even suggested should require a different background and certification compared with standard procurement (i.e., make it a different function). Perhaps it is too great a step to suggest that procurement is incapable of rising to the services challenge – we can all learn and change after all – but certainly our current ERP and procurement technology systems aren’t ready (and no, simply putting on a clever front-end to services buying as part of an eProcurement cockpit like Coupa has done is not enough).

With Fieldglass, will SAP become the services technology giant of tomorrow? Perhaps, but they'll be most likely to succeed if they let the services procurement experts from Fieldglass lead the charge and leave the widget-centric brain trust in Waldorf to continue to enhance traditional ERP and other enterprise applications, cloud or otherwise.

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