The Digital Transformation of Services Sourcing: What It Is and Why It Matters

gig economy

Remember when you could only book a flight by calling a travel agent? Or do a banking transaction by visiting the nearest branch? Buy insurance only through an agent? Shop for a new house only by reading the local newspaper classifieds, or search for a plumber or doctor only in the Yellow Pages?

The way consumers buy services now has been massively digitized, with the enormous benefits of great selection, convenience and value for all of us. Yet most business-to-business services are bought today in the same way they were bought 20 years ago. That still largely depends on a phone call between a business stakeholder who has a need and someone they trust to broker the work. That someone is often a senior executive in a large firm, who then rallies a team to prepare a proposal that will be presented to the buyer in person.

But change is coming.

The Potential of Digital Transformation in Procurement

Almost every business sector and function is undergoing digital transformation. Huge chunks of routine work are being automated, call centers are being replaced by chat services, and complex supply chains are designed and monitored with powerful software and new collaboration tools.

Even before other functions started to digitize as fast as they are today, procure-to-pay solutions were helping procurement departments improve visibility over spend and better integrate with ERP and finance systems.

These improvements are certainly beneficial but are narrow in scope. Up to now, procurement digitization has focused mostly on increasing efficiency through automating manual processes, unearthing process issues and redundancies, and helping organizations identify obvious spend opportunities they may have previously missed. But there’s much more that procurement can expect from its digitization investment.

Beyond process automation, one of the most important objectives of digital procurement is capturing unprecedented value, as data and information derived from predictive analytics and artificial intelligence evolve to insights and knowledge. Through this evolution, procurement can make its processes not only faster but also smarter.

The Services Gap

Nowhere is this more apparent than in the process of sourcing services. Despite progress in other categories, services spend remains difficult for procurement to centrally manage.

Services spend is enormous. According to McKinsey and Company, global trade in services is growing 60% faster than trade in goods, reaching as high as $13.4 trillion in 2019. If we look at a few specific sectors, global marketing services spend was over $457 billion for 2018; IT services spend is projected to reach $1.03 trillion in 2019 (up 4.7% from 2018); and legal services are project to reach $1.1 trillion by 2021. Clearly services are on the rise.

While services spend has grown rapidly, decision-making in most organizations has remained highly decentralized and fragmented across all functions and regions. It is not controlled by the procurement function but rather by the stakeholders who will be using a service; for example, outside counsel for legal departments and advertising agencies for marketing departments.

Other corporate functions usually retain control over their services sourcing because they are more familiar with the requirements — which are often shifting as categories are digitally disrupted — as well as the market of available suppliers. This approach makes sense on paper but can, as procurement organizations know well, quickly result in subpar sourcing and supplier management practices.

When a services supplier is chosen on the basis of a pre-existing relationship, as is frequently the case, it becomes more difficult to objectively evaluate the service provided or to move away from the provider even when it is not the best company for a particular job. What’s more, supplier validation and risk processes, which are becoming more stringent given overall business efficiency improvements along with pressures from regulators, make it more difficult for companies to on-board new service providers. That often leads to them sticking with the existing solution even as they know they are losing a chance to do better work and get more value.

Bringing Digital Transformation to Services Sourcing

So while the digital transformation applied toward goods and the accompanying processes to manage them (e.g., the purchase-to-pay cycle) has encouraged procurement toward an initial wave of digitization, we see that for services, change is still lagging. Fortunately, a new wave of fit-for-purpose technology solutions is now emerging to fill the gap, enabling procurement for the first time to begin reining in this sprawling mega-spend category.

It is proven mostly impractical for procurement to try centralizing decision-making over service spend. The business stakeholders are the true customers of these services, and only they can make a full assessment of fit and value. Bringing digital transformation to services spend management isn’t just a procurement act, it requires a change of habits for a large number of these business stakeholders. Successful e-procurement for services must embrace B2C user experience and interface to offer business stakeholders easy-to-use digital tools, which will help them better define their requirements and easily follow a structured procurement workflow.

Advances in internet connectivity and cloud technologies allow new digital solutions to offer a collaboration platform among business stakeholders and their teams, between them and service providers, and when needed, to involve procurement. Procurement managers can monitor progress and track compliance to company policy without interfering, allowing the business team to serve itself. But, leveraging this new technology, procurement can quickly jump in if their support is needed, with full visibility to the entire history of a sourcing event.

Significant developments in artificial intelligence and machine learning are going to enable B2B service spend management to finally catch up with the massive B2C services digital transformation. Imagine being able to apply best practices across multiple services spend categories, even as the requirements and nature of these categories change; gaining easy access to “should cost” benchmarks for services across many organizations and projects; receiving near-instant recommendations to select the best providers based on supplier capabilities matched to stakeholder requirements; and even benefitting from automatic feedback collection about provider performance that could affect pending purchase decisions. These kinds of rich capabilities will empower procurement to fundamentally change how they buy services, and represent a fully realized digital approach to this category.

What does this look like in practice? In Part 2 of this series, we’ll explore examples of varied service use cases and key performance indicators of how AI can transform procurement’s approach to managing services spend.

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