Today I’d like to welcome guest contributor John Martin of Building SaaS to Sourcing Innovation with a guest post on The Future of Sourcing … for Services. If you followed the On-Demand series, you might remember that I discussed his article “How True Software-as-a-service Delivers More Value” extensively in the fourth installment of my On Demand series.

Our focus is on purchased services: consulting services, contingent labor, outsourcing services, field services, legal services, etc. What we’ve found, in providing our Services Procurement solution to dozens of Fortune 500 companies, is that companies gain the best results by managing the entire end-to-end lifecycle of purchased services.

The primary characteristic of service categories is that they are all different. However, I’ll mention a few commonalities about managing purchased services, then suggest a few ways we’re seeing our leading-edge customers manage and optimize services spending.

First, here are some generalized characteristics about purchased services:

– Services spending is growing: With the increases in business process outsourcing and focus on core competencies, services spending is increasing twice as fast as that on indirect goods spending, according to CAPS Research. Economically, the prices of services are also inherently inflationary since they are closely tied to labor costs, which increase over time faster than goods costs, on average – the Federal Bank of New York’s analysis shows that services’ inflation rate has stayed consistently 2.6% over that of goods over the last three decades.

– Services spending is often difficult to manage centrally: For some services categories such as marketing services and legal services, functional executives “own” the supplier relationships and spending. For others such as contingent workers and facilities management services, the sourcing and purchasing activities are dispersed throughout the enterprise.

– There can be many unknowns at sourcing time: Some services such as contingent workers and print services have unique requisitions every time, so up-front pricing is difficult to establish. In other cases, the needs of the enterprise change more quickly than anticipated at sourcing time, which has led many multi-year outsourcing engagements to fail.

– Services spending involves a lot of uniqueness: every contract is unique with terms in the statement of work text, requisitions are often unique, services deliverables are different for every contract, and the quality and acceptance measures differ by category, contract, and deliverable.

– “Value delivered” is often a key concept for purchased services: When a services provider touches your customers directly (such as call-center outsourcing or field installation services) or can positively impact your business results (IT application development services, marketing services), the potential value of those services becomes a multi-dimensional concept (including multiple flavors of “quality”) to continuously measure and improve.

– Finally, services involve many additional risks: When a supplier’s workers come onsite to deliver the services, now there are risks to manage regarding security, safety, confidentiality, etc. For contingent workers, there are HR-related risks such as co-employment and worker classification, as well as tracking the results of prior work performed by the worker.

As a result of these characteristics of purchased services, sourcing becomes an ongoing process rather than an event. For example, in some categories such as contingent workforce and print, the sourcing event creates the marketplace of preferred suppliers, and each requisition is sent out to the suppliers for bid – sourcing at procurement time. For almost all services categories, the delivery phase produces information that allows better sourcing and contract negotiating in the next sourcing phase.

After managing this iterative process for a few years, it’s almost impossible to continue to improve the cost basis of services through sourcing, at least since wage pricing started firming up a couple of years ago.

So we’re seeing companies turn to other ways to improve services sourcing, as hints to the future of sourcing. Extending Eric Strovink’s compliance comments and Tim Minahan’s “frontline sourcing” concept (explained over on Supply Excellence [WayBackMachine]), here are some trends that we see improving services sourcing going forward:

– Link sourcing with procure-to-pay and spend analysis: Some would say that for services, contract execution and compliance are everything. The cost savings and value from contracted deliverables are on paper after sourcing, but are actually captured only through a tightly coupled procure-to-pay program. Then, spend analysis on the detailed requisition, deliverable and invoice activities allows improved re-sourcing the next time, in a cyclical sourcing-improvement process.

– Actively use learning strategies throughout the cycle to improve sourcing: Since services have many unknowns at sourcing time, and much of the services value is determined during the delivery phase, companies are engineering their supplier relationships and processes to maximize learning. For example, multi-sourcing sets up a competition among service providers, and spending can be directed to the better-performing suppliers. Companies are starting to track every touch-point with a supplier, gathering qualitative information through surveys to gain much more insight into value and transaction costs. Service-level metrics are becoming much more detailed and continuously monitored (with direct data feeds from the services supplier) to gain insight into the supplier’s processes and capabilities that underlie their delivered quality and value.

– Manage and shape demand: The demand drivers for many services are fragmented and hard to pin down – definitely not available in a production forecast. Since service prices tend to rise over time, it pays to focus on controlling costs through internal demand management, rather than just increasing pressure on suppliers each year. Demand for services is also malleable, as which tasks performed internally versus by the supplier can be changed if needed. Investigating internal demand drivers and supplier interaction processes can lead to ways to reduce time and costs by shifting activities to/from the supplier, redrawing the process boundaries, and eliminating non-value-add tasks performed by either party.

– Build tighter linkages into suppliers’ systems: In the direct goods world, linking into the suppliers’ inventory, logistics, and production systems is a now-common practice. In services, however, this is much less prevalent. In addition to pulling service-level metrics from the supplier (such as call and incident tracking information for call-center outsourcers), companies are adding system integrations for requisitions, deliverables, and invoices to greatly reduce transaction costs and eliminate the “echo-chamber” interaction costs of haggling over invoices post-delivery. Going forward, there is emerging interest in linking into suppliers’ availability, skill capability, and project tracking systems to better optimize delivery processes, and a desire for better collaboration tools throughout the lifecycle of interactions with the supplier.

– Invest more in supplier discovery and development: Most large companies have too many services supplier relationships, so supplier consolidation is the first effort. However, in order to keep up with the state-of-the-art in purchased services, we see a need to provide better tools for finding and starting up relationships with high-quality emerging services suppliers. Along the same lines, companies will need to more proactively develop niche and high-performing services suppliers in the upcoming years.

Thanks again to John Martin for this insightful post on The Future of Sourcing … Services.