Services Procurement

Forget Cost Savings – Give me Value

Several years ago, when I first began sourcing services, I was working with the Chief Legal Officer to develop his Preferred Law Firm program.  Bringing Purchases into Legal was a bold move – how could a procurement organization do anything but get in the way of Lawyers doing what they do?  But Jim was progressive and needed help.  P&G had just inked our largest business deal ever, we had just purchased the Gillette Company. Warren Buffet called it the “dream deal” and others talked about the combined power of the two companies to control the consumer goods space.   The then CFO promised investors savings and growth – new markets, elimination of management overheads.  For Jim, there was increased complexity – a new business and new markets to defend.

“Eileen, I can get more out of a 15 minute phone call with someone I know is an expert in the field than with some newbie from a big name firm who charges a lower hourly rate.”

That comment made perfect sense but I am so glad he took the time to talk with me about his business situation, and that I took the time to listen and engage.  What Jim needed was a relationship and a deal.  Jim wanted to get more out of fewer law firms, he wanted access to Top Talent who would provide quality results and he wanted to know he could count on these firms when he really needed them.

If I hadn’t taken the time to understand Jim and his needs and allowed him to teach me about his field, I might have chosen to apply the strategies and tactics that had worked in previous direct purchases roles – and I would have failed.

Buyers are accused every so often of only caring about cost. The presumption is that Procurement will select the low cost bidder which, in the view of the operator, will always cost more in the long run.  There is a “Golden Rule” of Procurement that goes something like this: YOU GET WHAT YOU PAY FOR. But it means so much more in the Service Industry – Jim taught me this when I worked for him sourcing Legal Services and I learned it again and again across every indirect area I touched.

The price the Service provider charges is representative of what they understand you want in the total Service relationship; the more comprehensively you address all aspects of the relationship, the more successful the partnership will be in delivering business results for both Client and Service Provider and the more likely WHAT YOU PAY FOR is what you wanted. There are internal costs not reflected in the supplier price that will make up the Total Cost of Ownership.

The Total Cost of Ownership refers to the composite of what the Supplier charges to deliver the Services and the effort spent internally to provide business support. Two critical efforts that require a buyers attention at the inception of a Service engagement is to determine 1) the Service scope and how the Service supplier will provide it and 2) how the business will adjust or change to receive the Services.  When the Service is a simple transaction or the services are commoditized, determining a fair price is fairly straight forward, traditional procurement techniques are appropriate and the Total Cost of Ownership is essentially the same as the invoice paid.

As the Service complexity increases, Buyers should take time to develop an Engagement Model which takes into consideration all the elements of value attached to the Service. With a well-designed Engagement Model, it is then fairly easy to calculate the Total Cost of Ownership of one Service offer versus another in order to select the real lowest cost bidder – or better stated, the real highest value Service provider.

So, when Buyers hear this feedback that all we care about is cost we can nod our head confidently and accept this feedback as a cry for inclusion in the Supplier Selection Process!  Working as a business team, outline all aspects of the Service so you obtain the Total Delivered Cost of the engagement upfront and can select the Service Provider presenting the overall best value. Here is a sampling of what you might consider to lower cost and increase value:

  • Quality The quality of Service output from someone who is an expert in the field will be far higher than that received from a novice, what is the mix of expertise that delivers the balance of results needed?
  • Simplification How straight forward is your current work process, how well do people understand it, how easily can they follow the best practice?  A well designed Service should aim to increase employee satisfaction by making it simpler for them to get their work done.
  • Compliance  How well are you complying with company policy or legal requirements?  Over compliance represents an opportunity for savings, under compliance represents a risk for even higher cost in the future.
  • Consistency Do you operate at more than one location or across multiple regions? Think about how much easier it will be when reporting results or deploying new approaches if the Services at all your locations were consistently being delivered. Note, consistency does not necessarily mean everything is the same. Consistency is also an important factor to determine another value – Sustainability.  Can you count on Services being delivered confidently from one moment to the next without disruption?
  • Business Protection  Be sure to consider the value of a well-crafted contract that includes important clauses like Liability, Privacy, Security, and retaining the “A Team”.

Smilie 2 IMG_1665IMG_0501 Thoughts?

 

 

3 thoughts on “Forget Cost Savings – Give me Value”

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