Putting the pressure on outside suppliers

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.

Elance includes a bill of services (like a bill of goods) function for managing complex contracts, such as business process outsourcing, service-level agreements and formula-based services. Combinations of service types can be bundled into a single contractor order. For example, a global IT consulting supplier might have an SLA with specific deliverables and a payment schedule, as well as items that fall outside the scope of the original agreement.

The software suite also allows procurement departments to configure business processes, such as sourcing rules, workflow, and access permissions, to accommodate multiple divisions, departments and locations. SPM 4 also provides flexibility for suppliers with self-service maintenance and change order management for master contracts. Buyers and suppliers have a common set of information to work with and can automate the reconciliation process, improve compliance and reduce invoice errors.

"Fundamentally, services are managed different that product," said Diana Jovin, Elance vice president of marketing and business development, enterprise solutions. "We can leverage a common infrastructure and harness financial workflow rules, but we are not replicating what's in [product] e-procurement. Services purchasing and management is an end-to-end process, and has a lot of frequent changes, unlike products. For example, during the course of an engagement with a consulting or facilities management supplier, you could have a lot of change orders. A solution has to have a mechanism to deal with changes and provide a history." In addition to Ariba, SPM4 integrates with Oracle and PeopleSoft e-procurement applications.

Elance is offered in a hosted or locally installed model, with a three-year minimum licence. SPM 4 is priced based on the amount of services driven through the application. Jovin said the entry level would be about $500,000 per year (with a spend of $50m to $100m on external services), including licensing fees, support and maintenance. Elance's typical three-year contract is in the $3m to $5m range, Jovin said. So far the privately held company, with about $70m in venture capital garnered since 1998, has signed up GE and a few other Fortune 500 companies in addition to Motorola for the latest version of Elance SPM.

Elance isn't the only game in town. Other firms, such as Fieldglass, IQNavigator, ICG Commerce and Convendis Technologies, provide procurement automation, but are not as flexible as Elance's solution. "The other pure plays like Elance are mostly focused on contract labour, with time and expense and now additional project-based capabilities," Degnan said. "Elance has more breadth and is focused on the bill-of-services concept." ERP players including PeopleSoft and Oracle, as well as Ariba are building out their services procurement capabilities. SPM4 is unique in that it supports a wide variety of service categories, said Degnan. "Elance seemed to lag the market a year ago, but in the last year the company is picking up forward thinking organisations that understand they need functionality to address services, and that contract labour is only part of the solution," Degnan said.

With outsourcing growing at a rapid rate, and the intense focus on ROI, services procurement and management is likely to make the short list of initiatives that get budget approval in the coming year.