After squeezing just about all the cost savings they can from the production materials they purchase, sourcing operations are taking a new look at the services buy.

Some purchasing operations be-came interested in the services buy about five years ago when companies began making moves to put ordering processes on the Internet. After the dotcom bubble burst, and purchasing realized that sourcing services entails more than simply adding technology to the buy, interest cooled. Now, companies are starting to recognize that applying purchasing processes and discipline to the services buy can help meet cost savings targets.

At one company, United Technologies Corp. (UTC) in Hartford, Conn., cost savings from sourcing services strategically have been as much as 70%. This story on the importance of purchasing involvement in the services buy at UTC is the first in an occasional series.

When Kent Brittan assumed his current position as vice president of supply management at UTC in 1997, the role of purchasing in the company's services buy was mainly tactical: Buyers put blanket purchase orders in place from which end user departments placed orders for services. "From a purchasing point of view, a very small percentage of resources were being deployed on services, but a large amount of money was being funneled through the department," says James Jordano, director of strategic sourcing, UTC.

Temporary services or travel readily come to mind when most buyers think of the services buy. But the purchase entails so much more, says Jordano, who suggests buyers look at each function within a company to determine the extent. Each year, companies like UTC spend billions of dollars on services.

For instance, the human resources (HR) function at most companies purchases benefits-related services, consulting services, print and materials, temporary labor, relocation services, training and other services. Facilities departments buy the trade services from electricians, plumbers, painters, architects, project managers and general contractors. Facilities also purchase groundskeeping services, MRO items, equipment maintenance, rigging and rearrangement services and janitorial services to name a few more. Buyers can do this exercise with IT and telecom, engineering, marketing, and finance functions, among others, to determine the extent of their companies' services buys and opportunity for cost savings, says Jordano. Other services—those related to office equipment, corporate travel—cross all these functions; they are used by every function in the company.

UTC comprises several large business units: Pratt & Whitney, Carrier, Sikorsky, Otis Elevator, Hamilton Sundstrand and Chubb Security. Each is a billion dollar company in its own right. Before Brittan moved to consolidate indirect purchasing at UTC, each business had a procurement operation that acted independently of the others. By combining the indirect procurement spend of the business units at the UTC level, the company created more than $4 billion in annual purchasing volume. This presented enormous opportunities to leverage purchasing and consolidate the supply base.

"For a large company, there's certainly some leverage opportunity when purchasing such direct materials as steel and plastic resins," says Jordano. "But the opportunity between, say, an elevator company and a jet engine company, is somewhat limited. It's different for services. The businesses all use relocation services, insurance and temporary labor among others," he says. "Opportunity for leverage on the services side is much greater."

As Jordano sees it, the services buys at many companies have these same characteristics:

• Purchases are often fragmented among many suppliers.
• Spend data on services (compared to spend data on direct materials) is not readily available and not completely understood.
• Departments buy services. Whoever owns the budget owns the decision process.
• Decisions are not necessarily made based on well defined sourcing strategies. Sourcing decisions are made locally depending upon: suppliers already identified by end users, a limited amount of time, and department budget.
• Sourcing decisions are not always based on analysis. Sourcing is the secondary responsibility of the person purchasing the services. He or she has a primary job to do: human resources, engineering, marketing, etc. They purchases what he needs when they need it.

Opportunities to reduce costs by applying strategic sourcing processes to the services buy are numerous, he says. Through leverage, companies can achieve economies of scale. Involving purchasing in the buying decision frees departments to perform assigned responsibilities (engineers can spend time on design, not buying). Use of standard processes for such activities as paying suppliers can result in more favorable contract terms and conditions. Managing supplier performance centrally can also help improve service levels.

When listing benefits of purchasing involvement in the services buy to end user departments and management, Jordano suggests sourcing operations not make the mistake of putting cost reduction ahead of service. "If purchasing doesn't deliver suppliers that can provide superior service, ultimately your customers will find a way not to use them."

At UTC, a centralized strategic sourcing operation now provides purchasing expertise and manages cross-divisional, cross-functional commodity teams to buy services. To date, it has reduced costs for services by an average of 40%: The sourcing operation has purchased HR software (70% savings), video conferencing (42% savings), insurance actuarial services (51% savings), software application services, including offshore programming in India, (41% savings), engineering services (45% savings), demolition services (19% savings) and pharmacy benefits (6% savings).

The next story in this series will present the people, process and technology necessary to put together a sourcing operation to manage the services purchase.