Indirect services – a challenge and opportunity for procurement (part 2)

We launched our new research paper on services procurement last week – available here to download free of charge on registration. We believe this is the most significant opportunity for many procurement functions; but as we said last week, there are some intrinsic difficulties in these categories that have to be overcome.

However, the benefits that are achievable through procurement getting to grips with these categories are very considerable. Here’s a brief extract from the Paper:

“Given the overall scale of the expenditure, there is a clear and powerful business case for addressing indirect services categories in a deliberate, structured manner:

  •  Value for money –Even beyond aggregation, the intangible nature of many services creates much greater ability to optimise requirements, service level and delivery methods than can be accomplished in materials procurement.
  • Control and risk management – Control and risk is becoming more relevant in how organisations manage their vendors and supply chains. For instance, the risks around contingent labour or project-based contractors working on sensitive projects or in risky locations are obvious. Better management of these categories can lead to understanding and control of that spend and a reduction in the likelihood of fraud, corruption or bribery.
  • Competitive advantage – Markets are increasingly dynamic and rapidly changing, which gives organisations the opportunity to develop competitive advantage by choosing the right suppliers and establishing strong relationships with them. Many services have a ‘multiplier’ effect where the benefit (or conversely, the damage) from the work delivered can be many times its cost".

So how can procurement organisations and individuals give themselves the best possible chance of success in these categories?  We believe there are four critical success factors; and you won’t be surprised to learn that we cover them (at greater length than here) as well in the paper.  In summary, they are -

  •  Market and supplier understanding – Procurement must develop a deep understanding of the markets in which they are trying to operate.
  • Stakeholder credibility – Gaining the ‘permission to operate’ in these areas is vital.
  • Appropriate sourcing strategies – The concept of ‘appropriateness’ is important in managing indirect services. Simply applying procurement methods that have worked for buying discrete goods does not work.
  • Data and technology – Access to the right tools and technology is critical.

We’ve then introduced the concept of the “maturity ladder” in the Paper. Procurement functions may start with being excluded from the category altogether. Then they may assist the budget holder, before graduating (if all goes well) to a meaningful involvement. Ultimately, procurement can actually drive benefits in these categories.

And as they move up the maturity ladder, we often see organisations becoming smarter in their use of technology to support their journey, starting with nothing or a few spreadsheets, then progressing through ERP to more specifically designed tools. As we say,

“Organisations at the most successful end of the scale will retain ERP for the backbone of their transactional records whilst almost certainly use specifically designed technology to support the management of their indirect services spend categories”.

More later this week when we’ll look at the tools and technology required in more detail.

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