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At Scott, Madden, we have developed an approach called ServiceSpend that helps clients significantly reduce the cost of acquiring and using business services. We believe that business services can be managed as effectively as you manage other commodities through understanding your spending patterns, benchmarking against companies that are managing their service spend, and launching improvement teams to use strategic sourcing principles to reengineer business services. While most companies have devoted time and attention to improving the procurement and supply chain process for goods and materials, business service spending is a difficult and neglected area of company spending that involves several disciplines:
- Cost management
- Strategic sourcing
- Supply chain management
- Business process redesign
- Organization design
- Information technology
Business services at the average utility company can include temporary service workers, consulting services, professional services, and outsourcing contractors. The sheer numbers of suppliers across multiple functions and business units creates a situation in which companies are spending much more than they need to on business services. There are a number of reasons for this:
- Lack of data visibility. Most companies today do not know how much they actually spend on external business services.
- Supplier proliferation. Large companies may have thousands of service providers that have never been classified or examined.
- Decentralized decision-making. Buying decisions for business services are largely decentralized.
- Lack of spend control. There are few, if any, spending guidelines related to business services. Standard contract terms and conditions are poorly designed to handle business service spending.
- Multiple processes. Services sourcing and delivery is managed on an ad-hoc basis. Each buying organization follows its own internal process, with little process standardization.
- Little leveraged spend. Few companies apply strategic sourcing concepts to their full range of business services. Services spend is poorly leveraged across business units.
- Focus on transaction cost. Buying decisions are most often made based on transaction costs (bid price) rather than the life-cycle cost of service delivery. Most service costs occur after the original transaction.
- Limited automation. Today's ERP packages are not designed to manage business services procurement or delivery management. PeopleSoft is the only vendor aggressively addressing this issue.
- Undersized investment and staffing. Few sourcing and/or buying organizations are adequately staffed to manage business services procurement and delivery.
Effectively managing business service sourcing and delivery is no walk in the park. Many of the same excuses we heard when implementing world-class materials sourcing and management are being expressed with respect to services. However, the business benefits of transforming business services sourcing are substantial. Applying supply chain management practices to services procurement typically results in savings ranging from five to 20 percent of total services spend.
We have found several sources of savings from business services cost reduction: reduced spending, value engineering, process improvement, and other benefits. (See chart above.) Scott, Madden's Service Spend diagnostics will help you understand your spending and focus on the areas of greatest potential savings. Our methodology will guide your teams through a disciplined approach that lays out key actions and responsibilities of each team member. We believe that improved management of business services spending offers tremendous opportunities for cost savings and improved operations. Take the quick ServiceSpend self-assessment below and see if business services procurement is an area where you could improve the bottom line. It generally costs more money to wait than to begin.
