Even though there is no inventory, nothing physical to return, and very few recovery opportunities available, even if the supplier fails to perform, you still need to manage your services categories strategically. Why? As per the Hackett Group Spend/Savings Visibility Study (in 2010), 48% of indirect expenditures (composed of T&E, Marketing Spend, Logistics Spend, and Professional Services) are primarily services-related, and an additional 35% (composed of IT/Telecom) are largely-services related.
Furthermore, when you consider that, in some organizations, indirect spend can approach 50% of spend, and that the organization is often left with nothing tangible to show for the spend when all is said and done, strategic category management becomes even more critical on these categories. And extra attention should be focussed on the seven steps that come into play.
Phase 1: Rationalization
When it comes to services, you need to not only analyze your options from multiple perspectives, but consider different strategies. While it is often beneficial to dual-source from a product perspective, to insure continuity of supply, dual-sourcing from a services perspective is often detrimental. For example, hiring two agencies for a marketing campaign is a waste of money, and if, by chance, your cell phone carrier goes out of business, there are at least six more to pick up the business the next day. You will likely need to single source, so you need to do so with care.
Phase 2: Supplier Identification
Not only is it important to open up your search, but it is important to qualify your options more completely. For example, where Marketing is concerned, if the primary need of Marketing is brand building, then the focus should be on agencies with that specific specialty. If the primary need for management consulting is to help the company with international expansion, you need to find a consulting organization with expertise in the target market – and it may not be a Big 5.
Phase 3: Sourcing
Unless you have an in-house expert, you will likely need to call in an expert if you want to get the best deal. Services, and services firms, have their quirks that you will need to understand intimately to get the best deal. For example, in advertising, bundling creative and print is not likely to save you money, as savings in print come from consolidated volumes with a single print house, and volume comes from consolidating orders across campaigns. In Logistics, the best deals are often found on the spot-market, especially if you have a little leeway in delivery schedules. In Telecom, you’ll get a great deal on the most common base package for your mobile devices, but the outliers who go over or who need the high-end packages will be laden with 100% profit margins to help the carrier make back what it gives up on the base. And so on. You need to know the gotchas, and how to avoid them.
Phase 4: Contract Award
The contract is very important, and detailed delivery and performance requirements are a must, otherwise, you’ll have no recourse if the service provider fails to deliver. In agency spend, make sure you have fixed delivery dates, penalties for late delivery, and termination clauses for repeat offences. In print spend, make sure you have contracts that state you don’t pay for their mistakes. In telecom, make sure there are no-pay clauses that state you don’t have to pay after notice of termination is given, even if they forget to deactivate the device/account for 30 days, and that you can apply rebates immediately. In professional services, make sure you have the right to withhold final payment until the final deliverable has been completed and accepted.
Phase 5: Supplier Management
Supplier management needs to be more active than it does in product-based supply chains. In a product based supply chain, once the chain has been worked out, and the first batch of products has been accepted as meeting quality standards, visibility solutions, that inform you of a potential hiccup, can often minimize the need for day-to-day interaction with the supplier until a change is required. No news is often good news. Not so with services. No news is almost always bad news. It typically means things aren’t going to plan and the supplier is trying to avoid telling you. If you aren’t managing the supplier and monitoring the situation, it’s likely that you won’t find out until it’s too late.
Phase 6: Procurement
It’s very important to send a purchase order with a clear statement of work, approved amounts, a payment schedule, and specific instructions (and account codes) for the invoice. It’s critical to capture the correct data for reconciliation, reporting, and evaluation purposes. If you can’t compare approved budget to actuals, you really don’t have a good grip on what your services are costing you.
Phase 9: Recovery Management
If deadlines are not met, overpayments are (accidentally) made, discounts aren’t applied, or other terms and conditions are not met, you will need to recover monies from the supplier. If you have cut a proper contract, appropriately managed the supplier, and procured properly, recovery will be possible (although you may have to threaten / go through with arbitration and/or legal action with suppliers unwilling to cooperate — but be sure you’re ready to sever the relationship before progressing to legal action).