October 16 , 2018

The Inevitable Challenges with Procurement of Services

by Procurement, Source-to-Pay, eProcurement

Procurement of services continues to be a challenge for the procurement departments. Read this blog to find out why and learn how to overcome the challenge to support your organization in a modern way. 

procurement of services

I’ve been involved in the source-to-pay industry for over ten years now. During the last decade, the field of procurement has developed and evolved a lot with new technology. But the challenges associated with procurement of services – a complex and continuously growing spend category for organizations, by the way – seem to be unavoidable.

Has procurement of services evolved meaningfully to overcome these perennial challenges? Are we moving in the right direction?

The two pain points: ordering and receiving

It is the fundamental nature of services that makes it difficult for procurement professionals to manage the category with similar discipline as they handle the purchasing of standardized goods. But is the procurement of services evolving meaningfully to overcome these challenges? Let’s focus on the basics: ordering and receiving.

Ordering services is not very straightforward because, at the time of requisitioning or ordering, the exact deliverable might simply be unknown. A simple example is to imagine an event where there’s an open bar. The bartender that is hired for the event will keep track of everything, but you won’t know the total cost of the beverages until the event is over. How do you make that requisition in a structured way?

You’ll probably create a free text order with a general description of the beverages wanted and perhaps the expected number of people at the event. It gives your buyer the minimum of information to give in turn to the supplier. The result of such a process typically is that you want something, and you get something, but they might not be the exact same thing and not at least at a pre-agreed cost. The process to order the service isn’t quite as controlled, predictable and cost-effective as desired, but you’ll do the best you can and make allowances.

The second issue arises when receiving the services. In the example above it’s pretty straightforward to track that your order has been fulfilled. But what about technical services, for instance website support, provided by an external provider? Sure, the service provider is under contract with pre-negotiated prices and terms, but obviously, you only want to pay for work that’s been done. How does an automated procurement process handle a few hours of work here and a few there, when on top of that the work can also be ad-hoc and unplanned?

In many cases, the systems won’t support different Units of Measure (UOM) against which you could accurately receive a service that is typically a non-catalog item and measured in hours spent instead of units, for instance. And if ordering the service accurately is cumbersome, tracking service fulfillment is even more so, due to imprecise specifications and the fact that the service might entail both fixed costs, such as an hourly rate, and variable expenses. The receiving part is important because it allows the supplier invoices to be matched and paid against the services received, making it easy to determine whether the cost on the invoice is correct. In addition, it also enables transparent spend analysis and cost tracking, and if there’s enough information available, supplier performance management.

 

System-supported procurement of services

The sources for challenges in procurement of services have stayed the same. What has increased dramatically is the need for procurement departments to raise their game. In practice, adding to the complexity described above are the increasing product and service bundles, clever contracts that have both fixed and variable costs to consider, and scaled pricing.

A modern procurement solution (at least ours) can handle most service-related procurement issues with smart forms, comprehensive contract management integration, and robust supplier information management. Let’s first focus on the smart forms. Think of it as a much more useful version of the classic ‘free text’ method of requisitioning. The smart form is pretty similar to what you’ve experienced online if you’ve gone through a process of ordering something that requires configuration. The smart form guides the ordering process with a series of drop-down option lists, which makes the eventual requisition quite specific and greatly improves the buyer’s ability to place the order – and increases the chances of the supplier invoice matching the order when it comes in.

A similar key element in modern solutions for the procurement of services is the service entry sheet. It gives the supplier of the service the ability to sign into the customer’s portal and report directly the amount of work done and potential additional expenses. The service entry sheet generates a workflow in the customer’s system, and when it is approved, the supplier invoice can then again be matched against it.

 

What’s in store for the near future?

Looking into the future of procurement of services, most industry pundits would point to a fully integrated supply chain, which uses a combination of analytics and artificial intelligence to anticipate demand and take actions accordingly. I’m excited, for instance, about 3-D printing and what it could mean for remote locations and the need for spare parts. You might think that I just lost track as purchasing spare parts is not a service, but what if the printing was enabled by a smart contract (using blockchain technology), which would have IPR-licensed options for 3-D printers with video support for installation. That’s an evolved service a space station or a research station in Antarctica would benefit from.

To close this blog, I’ll say that the process of services procurement has evolved over the years, but more for some than others. I continue to see organizations where the basics challenges are yet to be overcome. Then there are others who have moved further along the maturity wheel and are able to focus more holistically on their supply chain, ensuring suppliers are aligned directly with customer satisfaction.

This holistic approach requires the realization that you (meaning the procurement department) have a responsibility to ensure customer satisfaction and support of your organization’s output through efficient vendor interaction and timely delivery of goods and services.

I’d be interested in anyone else’s take on this topic, so feel free to comment or write me on LinkedIn or Twitter.

  

Rowan Lemley

Rowan Lemley


Rowan has more than 10 years of experience in the purchase-to-pay arena. During this time, he has managed the go-to-market for a diverse set of portfolios including Accounts Payable Automation, B2B Networks, Financing Services, eProcurement, and Product Information Management.

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