The Emperor has no clothes. That was the message with which Geoff Aldcroft, head of UK purchasing at pharmaceuticals giant AstraZeneca, attracted attention with a critique of e-procurement practice at the 2004 annual conference of the UK’s Chartered Institute of Purchasing and Supply. “What I was saying,” recalls Aldcroft, “is that most of the activity in e-procurement was directed towards buying ‘things’, and there wasn’t a great deal of evidence concerning e-procurement’s ability to deal with services, especially complex ones.”
Just weeks later, the difficulty highlighted by Aldcroft was starkly articulated in a report by analysts Aberdeen Group. Despite services representing 30 to 50 per cent of indirect spending at many companies, Aberdeen concluded that businesses faced “formidable challenges” in eliminating what it saw as the waste and inefficiency that typically accompanied the predominantly manual purchasing processes that were involved in obtaining business services.
The problem? As Aberdeen saw it, not only was the procurement of business services inherently more complex – from both the purchasing life-cycle management process and cost model standpoints – but also the purchasing of services was highly decentralised, typically being carried out by front-line employees with little or no training in purchasing techniques. With few supplier negotiation skills, and little governance oversight, these employees often paid premium prices.
If organisations have faced challenges when contemplating the e-procurement of services, software providers have struggled to adapt the catalogue-based foundations upon which their solutions are usually based. “Traditional e-procurement systems were not designed with the complexity of services procurement in mind,” says Steve Savignano, CEO of Ketera Technologies, a so-called “third generation” spend management vendor. “Services are based around contractual relationships, which are not readily capable of being catalogued.”
Even so, that hasn’t deterred companies from putting services into their catalogues. As David Eakin, professional services director at the London-based BuyIT Best Practice Network – and a former west European purchasing director of Ericsson – points out, the creation of a catalogue helps to drive users to preferred suppliers.
Sarbanes-Oxley and other changes to the regulatory environment are also acting as an impetus, adds Gavin Herman, head of procurement for Europe, Asia-Pacific and Japan at investment bank Morgan Stanley. Not only does e-procurement aid compliance from an administrative point of view, he points out, but it also helps to enforce sourcing policies. Even something as basic as raising call-off orders against a catalogue, in other words, can yield benefits.
Those benefits can only increase as solutions become more sophisticated. AstraZeneca’s Aldcroft, for instance, today paints a more upbeat picture. “Ariba and other providers are now saying that their platforms can be used for services procurement every bit as much as they can for physical goods,” he notes. And in contrast to 2004, the claims now have sufficient weight for the pharmaceutical company to be taking them seriously.
Indeed, Aldcroft – now programme director for AstraZeneca’s European purchasing programme, responsible for securing procurement synergies across 16 European national sales subsidiaries – is undertaking an evaluation of how well the company’s Ariba procurement platform can cope with the purchase of services.
Trials with contract staff and consultancy services have worked – at least up to a point, he says. The sticking point is moving beyond using the e-procurement platform as just a front-end requisitioning tool. This calls for a richer way of describing the services that the company would like to procure, ideally within a catalogue of structured working briefs from which particular assignments could be commissioned. Although AstraZeneca’s present generation of Ariba software isn’t capable of this, the next release apparently comes much closer, says Aldcroft. At which point, he adds, the e-procurement of services such as conference organising or advertising campaigns is a real possibility.
It’s an optimism fully shared by William Northup, director of sourcing at US electrical component manufacturer Hubbell Incorporated, which has been trialling Ariba’s latest software in its pre-release “beta” version. One of the reasons why Hubbell signed up for the testing programme, he says, was to gain early access to a richer descriptive environment.
Its key targets are travel, car rental, telecoms and freight – both road and ocean. While some of these spend categories have never been looked at before, others have been tackled, albeit with earlier and less service-capable versions of the software.
Level of complexity
But for e-procurement systems to truly be effective in dealing with the purchasing of services, not one but several distinct issues need to be addressed, says Pierre Mitchell, a respected analyst who is now head of the e-procurement practice at business process benchmarking company the Hackett Group. “Compared to physical goods, services are much more abstract and bring a whole level of complexity that isn’t seen in manufactured components and materials,” he says. “There’s no easy equivalent of an ‘item master’: the description is the service required, the unit quantity is either one or the dollar amount involved.”
Comparison between competing service providers adds further complexity. With a standard description – “legal services”, say, or “marketing campaign” – competing providers appear to offer identical commodities, distinct only by fee-rate. In practice, of course, their capabilities and experience may differ widely. More fundamentally still, the business value put at risk through using an inexperienced or less-qualified service provider can be many times higher than any savings made through selecting them over a more expensive provider, as contemplating a failed legal case or marketing campaign amply illustrates.
Finally, notes Mitchell, there is the question of billing and payment. There’s no easy way to model how services are actually consumed, delivered or paid for: time-based billing or milestone-based billing, for example, both of which are common in the services field. “‘Drive-by’ sourcing events are one thing, but procure-to-pay is where the rubber really hits the road,” says Mitchell. “Worse, procure-to-pay automation is probably the biggest single challenge to service procurement, because it requires all these other issues to have been resolved.”
In recent years, the purchase of contingent, or temporary, labour has been where companies attempting greater e-procurement of services have focused their energies. “It’s always been the low-hanging fruit,” says Mitchell. Why? Temporary labour is not only easy to describe (“We need some extra people on the factory floor this week, owing to demand levels, vacation or sickness”), but also easy to quantify (“Fifty people this week and 75 the week after”) and relatively easy to reconcile and pay for (“Forty-five people worked all week, five were off sick for a day”).
Even in manufacturing and distribution operations, where skilled workers are needed to operated particular items of machinery, temporary labour can be deployed in low-skill or quickly acquired skill areas such as packing lines, general labouring or materials handling. For greater granularity, add skills to the service description: we need forklift truck drivers, road transport drivers, catering or janitorial staff.
For Sony Electronics based in San Diego, California, the motivation behind its adoption of an e-procurement system from IQNavigator in June 2002 was a combination of both improved sourcing and a better procure-to-pay process, explains its director of corporate procurement, Walt Sindewald. Of the two, the procure-to-pay process posed the bigger headache. The existing paper-based time-card system meant that costs for temporary labour were not only difficult to reconcile – hundreds or even thousands of workers at locations all over the US, including Sony retail outlets – but “lumpy”, with irregular billing and payment patterns.
The sourcing decision was taken care of with the switch to a different agency, explains Sindewald. The relationship with IQNavigator came about because the agency in question recommended it, prompting Sony to forge a relationship with the company and begin using its tool not only to raise requisitions for temporary labour, but also to reconcile the actual use of that labour, authorise payment and then transfer the money. Almost at a stroke, says Sindewald, Sony’s procure-to-pay difficulties evaporated. “The system is hooked up to time clocks, and as someone ‘badges-in’ or ‘badges-out’, it updates the database.”
Although Sony has since switched temporary labour agencies again, it has continued its relationship with IQNavigator, insisting that any subsequent agency uses it rather than introducing yet another requisitioning and payment processing tool. “Agencies sometimes believe that they should control who the software provider is, but one of the best decisions we’ve made was to have an independent contract with IQNavigator,” he says.
Instead of having the records of its consumption of contingent labour spread across several systems and databases, each relating to an engagement with a particular supplier, Sony now has a single block of data going forward into the future. Just as importantly, it no longer needs to worry about the introduction of any new systems that might be associated with a change in temporary labour agencies, which (as agencies are well aware) act as a source of “stickiness”, making companies reluctant to switch agencies in the first place.
It’s a rationale that, writ large, is arguably driving much of the direction in services e-procurement at present. If you’ve got a system that you like, runs the argument, and which delivers the functionality you want in respect of temporary labour, why not build on it and extend it to take care of the e-procurement of other services? And, in the process, retain not only a familiar common core of administrative processes, but also a body of data. Data that, what’s more, can play a critical part in more effective sourcing.
Extract best value
As Farley Blackman, vice-president of indirect procurement and Six Sigma initiatives at the oil giant BP, puts it: “Purchase decisions need to be made in a data-rich environment. To extract the best value from the services marketplace, it’s essential to have appropriate systems in place to provide that data.” At BP, he notes, e-procurement not only allows the company to access specific service markets efficiently, but also provides a mechanism to force compliance from within the organisation.
Software vendors, too, have been quick to see the opportunity. Like IQNavigator, Elance’s roots lie in the e-procurement of temporary labour and it is attempting to leverage that experience into other service areas. Today, the e-procurement of temporary labour comprises just over 50 per cent of the spend on services going through Elance’s system, asserts the company’s chief operating officer, Fabio Rosati.
For both companies, their underlying pitch is persuasive: for a software provider with a background in temporary labour, the e-procurement of services is less of a “brand stretch” than it might be for a catalogue-based provider that has historically been focused on the e-procurement of physical objects. Why? Because services, almost by definition, are forms of temporary labour, whether they involve running an advertising campaign, organising a conference or conducting a lawsuit.
“You may be buying more on desired outcomes rather than for a specific duration, but ultimately services are a form of temporary labour,” says Ron Jarman, global head of procurement at Reuters. From the systems perspective, the knack lies in embracing all the various forms of sourcing, billing and invoicing that are involved. This is arguably less of a leap for a system designed from the outset to handle temporary labour, rather than physical goods.
In practice, however, the starting point adopted by both vendors has been with services that are as close as possible to temporary labour in terms of parameters such as requisitioning, consuming and billing. One large global sportswear manufacturer, for example, uses IQNavigator to staff IT projects with computer programmers and other experts.
“With people services, project services and more complex services such as facilities management and legal services, again and again clients have asked, ‘Why can’t we do these?’ and pretty much found that they can,” says Brian Owens, IQNavigator’s senior vice-president of sales and marketing.
Part of the trick in doing so, notes Elance’s Rosati, is to recognise that services are multi-faceted in the degree to which they lend themselves to e-procurement. “Every service has aspects that are simple or straightforward, and aspects that are complex or more difficult,” he says. “If an aspect can be categorised, it makes it much easier to define and then subsequently re-use. Are marketing services more difficult to e-procure than contingent labour? Yes and no: a product launch is difficult, but a mailshot is a much simpler proposition.” A granular, piecemeal approach, in other words, is much more likely to pay dividends sooner.
In most businesses, services spend is huge, so optimisation is crucial. But compliance with legislative requirements, human resources policies and procurement best practice is just as important. “The level of maverick spending on services runs at twice the level of maverick spending on physical goods,” claims Owens. End-to-end e-procurement provides an opportunity to capture maverick spending at both the requisition and invoice stages – effectively doubling the chances of preventing it.
Services e-procurement may still be nascent, but it seems to have a highly promising future ahead of it.
ADOPTION: ‘Selling the savings’ is key to change
Successful e-procurement of services calls for more than just software systems capable of dealing with the intrinsic complexity surrounding the ways that services are sourced, delivered and billed. Organisations adopting the e-procurement of services need to change, too.
According to analysts Aberdeen Group, many of the firms that it interviewed admitted that company culture and resistance to changing long-standing roles and relationships within their organisations were significant barriers. “Interviewees repeatedly commented that ‘selling the savings’ was key to their success,” noted Aberdeen. How aggressively businesses could pursue service e-procurement, it believed, “depends in large part upon the capacity for change within the firms, and the extent to which executives and employees can manage that change”.
Khalid Khan, European director of consulting at Verticalnet, concurs. Success with services e-procurement, he says, “is less about the bells and whistles of functionality and more to do with adoption issues”.
Three separate factors underpin a successful implementation, Khan believes. “The first is to make it self-funding: that way, the people who are using it will look like champions, because they are delivering the savings that will pay for the project. Second, there must be senior sponsorship: a steering committee at the ‘C’-level buys into the objectives of the project – a lot of the existing internal buyers of services report into functions such as marketing, sales and finance.
“Third, work from the bottom up, refining the message: set up a centre of excellence within the organisation and use that to spearhead the initiative out to the rest of the business.”
Malcolm Wheatley is a freelance business and technology journalist who writes for a range of leading UK and US publications
