Services spend is becoming an increasingly important strategic category for procurement to manage as more and more businesses rely on third-party services to support critical operational or revenue-driving initiatives. Managing services spend presents procurement with a unique set of opportunities and challenges they have to navigate to maximize the value they are able to deliver to the business.
To better understand how procurement teams around the world are navigating those opportunities and challenges, we recently partnered with the team at SAP for a joint research project to survey several hundred global procurement professionals, We also conducted one-on-one interviews with selected leaders, to better understand how they are managing services procurement and, in particular, to identify key areas for improvement.
The findings, which we break down in the whitepaper “Benchmarking Services Procurement: A Global Study,” provide significant insight into the current state of services procurement, and, most importantly, helped us to pinpoint the areas of most concern… and opportunity.
Two of the most important areas of services procurement that are ripe for improvement are platform usage and outcome incentivization.
Services procurement is long overdue for digital transformation
The technology platforms organizations use (or don’t use) to manage services spend can have a significant impact on their effectiveness and potential for value creation. An alarming number (half!) of respondents said they rely on manual methods like phone calls, emails, and spreadsheets for buying services, and less than 30 percent said they use a specialized platform designed specifically for services procurement to manage buying and purchasing.
The survey results revealed a stark contrast between approaches to technology adoption between teams that use consistent technology platforms for sourcing and purchasing services and those that don’t. Organizations that use a services-specific platform, for example, are more likely to use the same platform for both sourcing and purchasing, are more likely to forecast demand, and are more likely to better track standardized data or ensure data security.
Our research revealed three key opportunities for digital transformation in services procurement:
- Better data governance: For procurement, managing a large volume of data is both a risk and an advantage, and governance should be top priority.
- Leveraging AI: Services spend can be costly to manage, which may make it a good candidate for AI assisted-management, expanding the organization’s capabilities while also reducing costs.
- Specialized technology platforms: Industry-based platforms are likely the way of the future for services procurement, as many report that generalized platforms do not provide the robust support procurement needs to manage services spend.
While some organizations have already embraced the digitization of services procurement, there is still a large swath of procurement teams that are being held back by outdated approaches and insufficient technologies. The study’s findings suggest that services procurement is long overdue for significant digital transformation, and this will be a key differentiator among procurement organizations going forward.
Time to start measuring and incentivizing services supplier performance
The majority of respondents to our survey said their preferred pricing mechanism is fixed cost, based on the achievement of milestones. Most do not employ bonus or penalty mechanisms tied to performance.
According to Gordon Donovan, Vice President Research – Procurement & External Research at SAP, this can be a real problem for services procurement: “I think we’re missing the incentivization and the innovation piece as well,” he said. “We talk about wanting to incentivize supplier innovation, but pure fixed cost doesn’t necessarily allow you to do that. There needs to be some kind of incentivization in there, and it should be tied down to the benefit of performance.”
Not too surprisingly, our research also showed that large companies with more than $10 billion in annual revenue are more likely to take a penalty/incentive approach to payment and also to incentivize supplier innovation and performance via gainshare models.
For many procurement teams, the problem with performance tracking and incentivization begins before a pricing model can even be established. For example, many respondents admitted to struggling with even establishing appropriate KPIs for each service category, let alone measuring their performance against those KPIs.
However, despite these current shortcomings in supplier performance management, there is great potential for procurement to improve supplier outcomes through pricing models that offer a penalty or bonus framework and encourage innovation, efficiency, accountability, and transparency.
The Opportunity for Services Procurement
As services spend continues to grow among organizations with no sign of slowing down, it becomes more and more important for procurement to elevate their ability to successfully source, purchase, and manage services spend.
Our research into the category points to multiple areas – digital transformation and incentivized pricing models being two of the most important – where procurement has the opportunity to enhance their impact and provide more value to the business. By embracing new approaches to these old challenges, procurement can move beyond limiting practices to unlock the full potential of services spend management.
