A New Way to Procure Services – Make them Products

Spend Matters welcomes this guest post by Marc Osofsky, general manager at Lionbridge.

Why is it so hard to increase services spend under management? Procurement departments have been struggling to attack services spend for at least a decade. As we know, services spend categories are highly attractive to procurement given their generally high supplier margins and large overall purchase volume. Most procurement organizations have been attacking numerous services spend categories through traditional methods, but making little progress in terms of increasing spend under management.

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Negotiating attractive new agreements is relatively easy, but getting buyers to purchase off of these new agreements is the main challenge. Procurement has largely outsourced this challenge to the newly preferred suppliers, but most of them have been largely ineffective as well with a “license to hunt” to find purchasers in the organization.

So why are service expenditures so hard to get under management? Even basic categories such as content creation, printing, app testing, graphic design, translation, interpretation and transcription have the following attributes that make increasing spend under management a challenge:

  • Fragmented spend
  • Highly-distributed buyers
  • Significant rogue spending with non-preferred suppliers
  • High transaction frequency
  • Requires custom quoting for each job
  • Each job may have several components that require quotes

Giving a new supplier a “license to hunt” is not enough to overcome all of these challenges. The end result is that a new preferred supplier typically gains a very low percentage attainment of spend under management. There are several reasons for this:

  • It is quite challenging and costly for the supplier to find all distributed buyers within a global organization and manually quote them on small jobs
  • Procurement has not made it easier for buyers to purchase from the preferred vendor than to go rogue
  • Payment mechanisms are quite complicated (or problematic) for buyer and supplier to use e-procurement invoicing systems when the services are not procured through the e-procurement system
  • It is easier for a buyer to go rogue than buy a service from a preferred provider and partially use an e-procurement approach

Given these roadblocks, much of procurement’s efforts to negotiate discounts with suppliers is wasted since increasing spend under management is largely blocked. What is needed is a new approach that solves the spend under management problem for services.

Can We Turn Services Into Products?

Much of the effort in services spend categories has been focused on contingent labor and professional services and trying to define statements of work (SOWs) to more closely manage this spend.

However, there are numerous services spend categories that are of a more standardized nature. Content creation, printing, app testing, graphic design, translation, interpretation, transcription, etc., are all service categories whose offerings are standardized across companies and do not require unique SOWs. These more standardized services can be managed in a manner that will address the challenges noted above and greatly increase spend under management.

The place to start is a mindset change. Procurement needs to ask the following question: What if services were products? If they were products, we know exactly what to do with them to increase spend under management. Industry observer Pierre Mitchell articulated this concept nearly 15 years ago, and the result was significant; most large companies took Mitchell’s advice and effectively deployed this model for their product spend.

“Most of the benefits [of e-procurement] derive from an increased purchase volume through negotiated contracts, typically from end users performing self-service transactions that use tailored electronic catalogs, workflow and electronic communications with suppliers,” notes Pierre Mitchell (former AMR Research Director, now Chief Research Officer at Spend Matters) September 2000. 

Is it possible that this same approach will work for services? All we need to do is get services to behave like products.

What Makes a Product a Product?

If we could turn these more standardized services into products, then we could use the standard e-procurement/punch-out catalog approach and use proven systems and processes to increase spend under management. So what is required to make a service a product?

  • Defined offering – specifies exactly what is included and not included in a given offering
  • Defined pricing – straightforward cost that enables budgeting and price comparisons
  • Instant, configurable quotes – online ordering system determines the cost of job
  • Online ordering – able to select and purchase
  • Delivery commitment – defined date order will be ready to retrieve online

Specifying services at this level to create standard offerings is not easy, but it has been done across a range of spend categories for enterprises.

So the dynamic catalogs exist for many services to be bought like products. The next step is to connect the e-procurement system to these “dynamic service catalogs” via a punch-out and use the standard approach to product procurement that has been so successful.

Connecting existing e-procurement systems to these dynamic service catalogs now makes it easier for distributed buyers to get instant quotes, purchase, pay and receive delivered services from preferred suppliers than go rogue. Spend under management will now increase since procurement has made it easier for buyers to use the preferred suppliers.

Several leading procurement organizations are in the midst of these services as a product (SaaP) deployments and plan on sharing best practices as soon as available. This is an exciting new approach that may finally solve the spend under management challenge for many service categories.

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