Daily Archives: September 12, 2008

Want to Save? Get a Handle on Services Spending!

Earlier this year, Industry Week, in their article about how Services Supply Chain Management [is] an Untapped Opportunity, picked up on a recent study by CAPS that found that purchased services averaged 39% of total purchasing spending. That’s a significant number – especially when it’s getting harder and harder to save on goods when energy and raw material costs are still spiking across the board. And its a worrying one when you consider that not only do the majority of companies not have a good technology-based solution to help them make the right decision, but they often don’t even know how much they’re spending on services, if they’re being billed consistently – and in line with the local market, or even being billed according to the contracted rates!

In one of my recent posts, I noted how Iasta used their optimization-enabled e-Sourcing solution to save roughly 20M on two different projects, including a 20M savings on a services spend of roughly 80M. They didn’t do this because optimization is a magic technology that always saves you wads of money (it’s not, and what it does is find the lowest cost solution that is feasible within your constraints), they did this because the organization was simply signing national contracts with large multi-purpose consulting shops at what it thought were good rates, instead of signing regional contracts with regional providers who performed the required services at local rates and who could offer discounts for local volume-based awards. They built a sophisticated RFX bid model that allowed providers to bid by resource type by location, and to offer discounts based on total dollar award across resource types and / or regions, and then fed all of the data they collected into an optimization model that had the computational strength to identify that, lo-and-behold, breaking the contract up among multiple regional providers who could give the best price in the region could save you a significant wad of cash.

In another of my recent posts, I noted how expert spend analysis consultancies like Opera Solutions and Lexington Analytics can often walk into a client and get them a rebate cheque on overpayments, that are common in office supplies, electronics, and there should be no surprises here, services categories. They do this not because they are experts in guilt transference or debt-collection, but because they know how to normalize and structure your data in a way that allows them to compare it against contracted rates, find overpayments, and, also, find duplicate payments that your vendor forgot to tell you about. They then prepare a report that makes it abundantly obvious that your vendor was ripping you off (whether they meant to or not), which essentially forces your vendor to either refund you or give you a credit against future services (as you have everything you need to take legal action, which is something you’d both rather avoid).

These days, services at an average mid-size company could represent a multi-million savings opportunity and savings at a large company could represent a savings opportunity worth tens of millions of dollars. Although these numbers weren’t significant in the early days of e-Sourcing when supply outstripped demand in many categories, raw material costs were low, and e-Auctions were leveling the playing field, now that you’re lucky to contain cost increases on your purchased goods to inflation, these numbers are very important. Therefore, it’s important that you get a good handle on your services spending and exploit it for the savings opportunity that it is.

So how do you do that?

  1. Do a services spend analysis
    The first thing you need to do is get a handle on how much you are spending on each services category, and how many providers you’re using in each category per region, and, more importantly, roughly how much you’re overpaying and whether there are opportunities for refunds, rebates, or credits.
  2. Identify, and order, your biggest savings opportunities.
    Stop when you get to 10 or when you’ve covered 80% of your spend. You’ll attack these first.
  3. Break your savings opportunities into two groups: those you have the expertise to do in house and those that should be done with the assistance of an expert consultant
    The ones that can be done in house will be tasked to senior category experts in your sourcing group and the rest will be tasked to your CPO to find the right external expert to help your organization.
  4. Identify the right, niche, technology solutions to assist you.
    You get good results when you use good tools. For professional services, consider using a provider like Provade with a solution that specializes in work-force sourcing. For printing, consider a provider like Noosh that specializes in print services.
  5. Implement a good end-to-end e-Procurement solution with m-way matching that integrates purchase order creation, electronic invoice management, payables management, and contract management.
    This will insure that
    • when a purchase order is cut, it is cut with the contract rate included,
    • only invoices that bill against purchase orders at the approved contract rate, and for a number of hours/days within approved limits, are accepted,
    • the payment is for the amount, and only the amount, on the approved invoice, and that
    • your negotiated savings are realized!