How do Services Procurement Analytics Improve Value and Performance?
The procurement of services is estimated to comprise nearly 60% of business purchases today – and often significantly more based on industry. Services providers are important suppliers of non-employee workers, delivering those resources through statement of work (SOW) agreements. Unfortunately, visibility into that services spend is often confined to the managers or departments engaging those resources, with little opportunity for enterprise-level management.
Market pressures have spurred organizations to maximize outcomes and control costs across all areas of spend, highlighting a need for better visibility into services procurement. The good news for procurement leaders is that data-driven technologies and procurement analytics are now in play that can deliver that visibility into services spend and unlock data for better engagement decisions.
From more cost-effective buying, to controlling compliance risk and improving how work gets done, the potential impact of better business intelligence on the management of services procurement is great. How does improved visibility bring better services procurement strategies to life? The following real-world examples shed light on the answer, showing how companies are using new levels of intelligence to gain more out of their services today.
Improving Performance: Procurement Analytics Lead to Better Business Outcomes
Traditionally, companies approached services procurement in a largely pre-determined fashion. They decided ahead of time that a certain task needed to be done by a vendor. Then they moved forward with securing that provider of services, often based on the lowest cost, with little insight on performance or fitness for the task at hand. It is a practice that still commonly occurs today.
In many cases, the resulting strategy is counterproductive. The company may engage a particular vendor to get a job done when outcomes would be more efficient and cost-effective through other means. An example of the work our Allegis Global Solutions’ (AGS) Procurement Solutions team provided for a global e-commerce organization underscores the value of a consultative relationship and the use of data to create better paths to outcomes.
Expanded Visibility Reveals Cost-Effective Options
The company budgeted $130 per hour for a computer security and incident response team (CSIRT) analyst and relied on a single supplier to provide the talent. Based on market information and data from a broader set of similar engagements, the AGS Procurement Solutions team determined that a $120 rate would be in line with expectations.
Unfortunately, the proposed $120 rate was not agreed upon by the client and provider for the role under consideration. This is a niche role with difficult-to-find talent, so the engagement proceeded with the higher rate. At the same time, the Procurement Solutions team made a concerted effort to dig deeper into the role, learning more about the unique needs the company required and potential future engagements while identifying supplier opportunities for that role.
Taking Action: A New Rate and Source of Talent
Subsequently, thanks to expanded visibility into resource options, strong relationships and understanding of the need, a resource was identified and placed at $115 per hour when the need arose again. By expanding visibility into sourcing opportunities, the Procurement Solutions team provided the client with a broader set of options, including needed skills at lower rates. The result was an annual cost savings of more than $30,000 on the assignment.
Improving Labor Classification: Procurement Analytics Help Reduce Risks and Costs
The second example highlights a persistent challenge in services procurement: Companies struggle to capture key contract metadata for their SOWs. The uncaptured information is surprisingly basic, including roles, rates and worker locations, as well as details on fixed deliverables and related resource allocations across their services portfolio. Many organizations have invested in spend or contract management tools. They believe these tools are capturing this information, but in large part, those systems are only used for storage and approvals as it relates to services spend on SOWs.
One result is a significant level of misclassified labor. In short, companies are securing labor through services contracts, but they use that labor as if they were contingent workers, a mode of engagement consistent with staff augmentation. The company may be paying for the services of the people it engages at a higher rate than is necessary, and it may be out of compliance with worker classification regulations.
Solving the problem requires an approach that uses technology to analyze vast amounts of contract information quickly and supplements the technology with human expertise to interpret and act on the data. Our work with a global manufacturing client highlights how applying analytics to solve the misclassification issue can yield a significant impact on costs.
Expanded Visibility Reveals High Misclassification Risks in 80% of SOWs
To support the client’s procurement function, AGS leveraged its DocuSiftSM analytics service to analyze 201 SOWs with 25 suppliers, primarily in IT services. The misclassification analysis looks at each SOW across 20 key criteria to identify four symptoms of misclassification, including resource characteristics like staff augmentation, a lack of standard SOW elements, clauses within SOWs that were more appropriate to staff augmentation and services described as staff augmentation.
The procurement analytics revealed a high level of misclassification risk in most contracts under management. This is not unusual in organizations that have engaged services in a distributed manner, with limited formal governance at the enterprise level, despite the use of “preferred suppliers.” Results included:
• High probability of misclassification: 165 SOWs with a total contracted amount of $23.7 million
• Medium probability of misclassification: 22 SOWs with a total contracted amount of $2.9 million
• Low probability of misclassification: 14 SOWs with a total contracted amount of $2.6 million
Taking Action: Apply Transition and Communications Strategy to Reclassify SOW Engagements
The data can only get you so far. The ability to layer in an advisory-based approach to drive action based on the data is important. Drawing from the findings, AGS helped this customer develop and apply several different strategies to address the identified misclassifications and achieve a positive impact on cost and performance along the way. Areas of focus included:
• Communications and a focused approach to transition misclassified resources to the existing contingent workforce program
• Review of agreements to identify cost-savings opportunities based on appropriate rates for the type of roles being utilized and services being delivered
• Development of SOW templates to reduce inconsistencies related to resource/role names, pricing and services descriptions (areas that typically lead to misclassification)
• Other actions, including the development of a strategic roadmap and changes in the governance process to set the stage for lasting improvement
Based on the actions taken, the company was positioned to agree to reasonable cost reductions for certain services providers and a reclassification of resources to reduce overall compliance risk. The repeatable process provides a valuable baseline to ensure continuous compliance and cost-optimization across the supply base.
Broader Supplier Choices: Expanded Options Control Rapid Budget Growth
One of the most common challenges in the procurement of services is that managers and procurement often depend on one supplier for their sourcing needs. This single-supplier focus creates several inefficiencies.
First, there is no visibility into the talent that can be considered for important projects. Typically, this will diminish the quality of talent being procured as there is no competition or comparison of services providers from a capability or cost standpoint. Secondly, stakeholders cannot consider pricing models from different suppliers. Historical data indicates that this lack of competition does not allow programs to realize cost savings over time, resulting in increased spend for the client.
For this client, the need to re-examine its services procurement options became urgent as it experienced more than $3 million in budget increases in one year. Not knowing why that increase was occurring through its supplier network, the company engaged AGS to evaluate the dynamics of the activity.
Expanded Visibility Reveals Heavy Reliance on a Single Supplier
To gain a clearer view into the current supplier and other resource options, AGS’ Procurement Solutions Supply Chain Management team partnered with client stakeholders to assess three potential issues arising from its vendor relationships. They included:
• Supplier performance (services capability, cost and quality)
• Improper scoping from the client stakeholder and/or suppliers
• Limited visibility into supplier sourcing options
Using AGS’ Acumen Workforce Intelligence® platform, the team was able to extract spend data and determine that $2 million of the total $3 million budget increase was tied to one client stakeholder and one supplier.
Taking Action: Using Data to Highlight New Options
AGS met with the stakeholder behind the single supplier relationship to understand their reliance on that service provider for specific project needs. As part of this discussion, AGS presented performance and capabilities data from several other suppliers actively supporting the client. These suppliers had proven success in placing the types of services being provided, as evidenced in key activity and quality metrics.
The assessment resulted in the rapid expansion of supplier utilization. Within six months of our recommendation, one supplier grew from zero projects to three critical projects, accounting for $2 million in spend. There were no budget increases for the projects and no unsuccessful finishes.
Takeaway: Visibility Drives More Impactful Services Procurement
The power of visibility into the services procurement landscape provides tangible and lasting benefits to the business. But visibility is more than procurement analytics and related technology.
To achieve real and actionable intelligence, three elements must be at play. These factors include the data itself. Does your technology ecosystem have the ability to bring together insights about your services procurement activity and contracts from multiple sources? Second, the information must be put in context of comparable data. Do you know your organization’s bill rates for particular assignments, and can you compare those figures to market rates for similar projects?
Finally, the value of data and analysis is realized when action is taken, whether to adjust a bill rate, revise performance expectations or engage new suppliers. Do you have the expertise and capacity that are both needed to interpret the information, make the right decisions and drive needed changes?
AGS Procurement Solutions focuses on bringing all the elements together: the data, context and action. From cost and performance, to better access and more resources, the results we help companies achieve attest to the value of visibility in services procurement today.