Services spend management: Find your inner salesperson
Procurement's role in services spend management requires internal selling, communication skills.
By David Hannon -- Purchasing, 2/12/2009 2:00:00 AM
As a procurement professional, you have undoubtedly sat across the table from an endless stream of overly conversant, well groomed salespeople trying to sell you the latest widget for what seems like an unrealistic price. Did you ever consider that those same selling techniques you've rolled your eyes at could, in fact, help drive the most successful sourcing effort of your career?
According to procurement executives and consultants that have had success in managing the services spend areas, it's the internal selling and marketing skills that often open the door to services spend management success.
"You've got to win hearts and minds in services procurement," says Robin Jackson, CEO of U.K.-based procurement consulting firm ADR International, adding that services spend management requires a "much more empathetic approach" that shows a true understanding of the internal stakeholders' goals and requirements. "It's a very different approach than materials buying—much more focused on value benefit."
Even more than their materials buying brethren, services buyers need to work with internal stakeholders on defining the value of a service and provider more than reducing costs. For example, the value of an outside marketing firm's ability to increase sales vs. that of an internal group may be more important than its hourly rates. Or the value of a legal firm's ability to win a key trial may outweigh its list of fees. And while that value vs. cost evaluation certainly plays a role in materials buying, it plays an even bigger role in managing the services spend and makes it very difficult for one buyer to wear both hats.
Dean Edwards, CPO at health services provider Kaiser Permanente in Oakland, Calif., has managed services spend areas for much of his career. He says a materials buyer may be too quick to devalue the service provider's offerings and the depth of the relationship in favor of cost, at which point "procurement then becomes the stakeholder's worst nightmare—a caricature of itself and is solely focused on price reduction and leaving the stakeholder to clean up the wreckage."
The classic example is in the marketing spend area. Procurement's first move in getting involved in this area may be to tell the marketing department that procurement can reduce its overall costs by 20%. But for marketing, that will likely mean a smaller budget the following year and marketing departments often measure their worth by the size of their budgets. So guaranteeing a cost reduction in that area is perhaps the worst way to win support.
Instead, Edwards says, the most effective approach is to "introduce procurement's policies and capabilities into organizations that have had little or no contact or experience with procurement support in the past. We don't consider it 'taking over the services spend.' Instead we market our services as collaborative rather than being seen as coming in and taking it over."
Bob Koontz knows a thing or two about bringing value to internal stakeholders. Having worked for consulting firms Accenture and Bear Stearns in the past, he developed strong "value selling" skills in helping clients successfully manage the services spend. It comes as no surprise, then, that he wound up as vice president of procurement at New York-based MTV Networks, a services-heavy entertainment company. Koontz says the key is to have the final sourcing decision made by the business unit and not by the procurement group so procurement acts as a resource or internal consultant on the decision rather than mandating the decision.
Apples to apples—bidding out services
With the support of internal stakeholders, one of the areas where procurement can also bring value and add expertise to the services spend is in bidding out contracts. And when it comes to running a services bidding event, the most difficult part is getting an "apples to apples" comparison in the bids. What one service provider plans to bring to the job could vary dramatically from what another might envision doing to fulfill the service requirement.
So perhaps the most important step in a services bidding event is the first—writing the scope of work and clearly defining what is and isn't included in the project and how the suppliers will be rated. If that step is done properly, the bids will come in like formats and apples can be compared to apples.
"Bidding out services requires a lot more pre-work than materials-bidding events," says Koontz. "It's important to have the service levels and the penalties for not meeting those service levels agreed to up front. Only then can you put it out to a bid."
Mark Rubin, a contract purchasing agent working with National Grid in Westborough, Mass., has been involved in the services buy at various companies for 17 years. Typically, his first step in qualifying suppliers for a services-contract bidding event is to run a Dun & Bradstreet report on the suppliers to uncover any liens or lawsuits that may be pending. From there, buyers need to unbundle the price for the service, Rubin says, to effectively run a bidding event. "A service cost might have maintenance or warranty costs buried into it. You have to find the core service cost by a unit—cost per hour or per visit—to compare the bidders effectively."
And if he's holding a bidding event for a new service area that has not been bid before and includes a list of new suppliers, the pre-bidding work gets much more involved. Rubin works with a cross-functional team of internal stakeholders to scorecard bidders based on a 32-question questionnaire.
"We ask suppliers if they have a business continuity plan—if their lab loses power, what is their plan? Where are their software servers located? We want to know about their financial stability, especially if they're privately held."
In addition to the scope of work, services buyers need to clearly define pricing models prior to a services bidding event. And if it's a spend area that has not been put out to bid before, procurement may not be well versed in the industry standard pricing models. Koontz says both internal and external contacts can be useful in providing information on what pricing models are most used for a given service.
"If you try to introduce a pricing model that the suppliers have not seen or aren't comfortable with, the bid is not going to work well," Koontz says. "It helps to work within the norms of a given industry. In some cases you can break new ground but for the most part someone has tried it before."
When asked which service area is most difficult to put to bid, most experts didn't hesitate in their response: Consulting services.
"You have to be careful about it because the businesses and executives have their favorite firms," Rubin warns. "Some consultants have never been questioned on their billing due to internal politics" which can make purchasing's job a real challenge.
Koontz, a former consultant, knows this all too well. "Consulting is very relationship-driven and the supplier is seen by the internal stakeholders as an internal contact or has done the customer some favors in many cases, so that can make people reluctant to consider change. And ultimately, that's what procurement's job is in the services spend—to get people to consider change. Not drive necessarily to make the change, but consider change."
"We get asked about bidding consulting services often, but all of the same rules apply," says Chris O'D Malone, director of shared services with procurement outsourcing firm Expense Management Solutions in Southborough, Mass. when asked about bidding out a consulting contract. "You need the scope of work identified. With consulting each firm will have their own slant. You want to make sure the deliverables are clearly defined. And the pricing model should dictate if it's a fixed fee, time and materials, hourly rate, etc. so that you get the bids back in the format you want."
Tracking performance
Another area where services spend management differs from the materials spend is in tracking the performance of a provider. Most experts agree that with a material that you can see, touch and feel, it is easier to identify quality issues, whereas in services that process is more subtle.
Scorecards are perhaps more crucial to the services spend because it is a way for the company to tell the service provider where it should focus its efforts. In fact, if the KPIs for a scope of work are written effectively, in many cases they can populate the scorecard for the winning bidder.
"Managing a relationship with a services provider does require a buyer be a little more proactive," says Koontz. "It's not always obvious when service levels aren't being met by a services supplier as it may be in materials." And, again, it requires closer contact with user of the services.
To get a clearer picture of the service provider's performance, Edwards recommends doing 360 evaluations where procurement serves as the middleman, getting the opinions of both the internal stakeholders and the services providers. Why? "Well in our separate surveys and interviews, we'd hear gripes and complaints from each side but when we all got in the room together it was a gigantic lovefest," he laughs. "So by using surveys and the 360 evaluations we were able to call out the issues at hand and solve them rather than let them fester. That helped drive performance and the relationships."
And so, again, it comes back to procurement working closely with the internal stakeholders who see the services being performed more often to gauge service levels. "Anyone that has receipt of that service should have input on scoring," says Malone, who suggests breaking scorecards into four categories: financial, operational, qualitative and strategic. "We're seeing a new area around compliance for scorecards including Sarbanes Oxley, regulatory, Green and other areas."
Build internal relationships
For companies that do not have buyers dedicated to sourcing services, the challenge may be deciding who should spearhead the effort. Clearly, the priorities for a successful materials buyer are not the same as those for a successful services buyer, but in some resource-strapped procurement organizations, some materials buyers are shifted to a new or growing services procurement team.
"You need to be able to build internal as well as external relationships and that's not the typical background of a materials buyer," says ADR's Jackson. "It's more like a sales process than buying process in some ways."
Buyers with experience dealing with the list of services that will be on their plate are most valuable, even if it's from the user side, not the procurement side.
Edwards says Kaiser Permanente's services procurement team includes a procurement director responsible for business products and professional services and that person has a team of sourcing directors and managers in various services areas. "We have one person focused on marketing and sales specifically but in most other service areas we're more opportunistic and project-based," he says.
Rubin points out that "It's easiest if you go the other way and narrow someone's role—if they bought a dozen services, it's easier to focus them on fewer areas than more."
Outsourcing is also a more frequently considered option in services procurement than in materials procurement for several reasons.
"Not every procurement organization has the expertise for every service it bids out," Malone says. "And that's where we come in. We [contracted procurement services providers] can add value in areas such as real estate services sourcing that might not be an in-house expertise area."
For more information on Services Spend Management...
To get a better feeling for procurement’s role in this process, Purchasing.com recently interviewed Robert E. Kennedy, executive director of the William Davidson Institute at the University of Michigan and author of a new book on outsourcing entitled The Services Shift. Read the interview
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