Putting the pressure on outside suppliers

Summary:How to go about cutting costs from external supplier relationships

CFOs are scrutinising everything from the cost of toilet paper and printing to consulting services and contingent labour cost. It's a fact of life in the post-bubble era, and the smartest companies are figuring out how to get more cost efficiency, visibility and leverage in their external supplier relationships.

The challenge in wringing costs out of external services, according to Christa Degnan, research director at Aberdeen Group, is that less than 50 percent of companies have an enterprise-wide, systematic approach for dealing with the supplier community. She estimates that a quarter of external services are done without contracts because companies lack an easy way to communicate to employees a schedule of approved contractors. Aberdeen's research also revealed that 28 percent of enterprises that have a formal process for managing an external services supply chain rely on paper and telephony for sourcing and purchasing.

A loosely managed external services procurement process becomes a glaring issue for CFOs, given that external suppliers account for the largest percentage of spending among enterprises. Degnan believes that 10 to 20 percent is a conservative approximation of what enterprises can save by effectively managing external services. "A lot of companies have never tracked services spending systematically. With a third to half of spending going toward external services, the savings can be big," Degnan said.

Several companies are attacking the problem with e-procurement software, mostly growing out of the catalogue purchasing and contract labour management categories. However, services are typically more complex and require a less rigid paradigm to handle various types of contracts and service provider relationships.

Motorola, for example, spends between $4bn (£2.39) and $8bn annually for "indirect" services, such as consulting, software licence management, outsourcing and marketing, according to Dennis Neumann, director of indirect e-procurement solutions and operations. His company recently integrated Elance's services procurement and management (SPM) application suite, SPM 4, with Ariba Buyer software. Neumann estimates that the deployment of Elance's SPM 4 can indeed save Motorola 10 to 20 percent annually on indirect goods. "Previously, we had numerous contracts with the same services supplier," Neumann said. "Each part of the business would negotiate its own deal, resulting in pricing discontinuity. Now users have visibility, so we can maximise effectiveness by having preferred pricing with preferred suppliers."

Neumann also noted that Elance's solution allows employees to establish milestones and track the performance of suppliers. Currently Motorola is using Elance in the United States for consulting and software licence management, but the company is looking to deploy the software for other services.

Topics: Networking

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