By Dr. John W. Kamauff, Principal, Archstone Consulting
and
Geoff Peters, Principal, Archstone Consulting

Overview
Professional Services is a significant spend area - in some organizations it approaches 20% of total external spend. However, in many organizations, Professional Services spend has not been managed as effectively and aggressively as have other categories - savings are being left on the table. Professional Services is one of several "complex categories" whose characteristics make it more resistant than others to effective management: a diffuse base of buyers and budget-holders, lack of transparency, complex linkage to business activities, natural degree of discretion in demand, specifications, and vendors, and degree of vendor to buyer relationships inherent to the category. Too often we see Procurement organizations steer clear of the Professional Services category citing a "highly politicized" nature, attachment of senior management to specific providers, resource intensity of managing the category, and a legacy of failed prior efforts.

A number of "top-quartile" organizations have overcome this complexity and have been able to effectively address Professional Services - using structured, methodological approaches, with a balance of sourcing and category management techniques, to drive extensive savings of up to 15% or more while gaining better quality, performance, and visibility.

In this article we discuss the key challenges to managing this complex category and a recipe for success founded on the best practices of “top-quartile” organizations. By applying these techniques the majority of organizations can obtain significant ROI.

And the gloves are off ...
The current Economic Environment has provided an increased focus on cost reduction in non-traditionally sourced areas, and the timing for introspection across a broad spectrum of Professional Services is right. Building upon an historical emphasis on core competencies and strategic outsourcing, Professional Services expenditures have become an increasingly significant portion of the overall cost structure and competitiveness, therefore gaining the critical attention of executives. As an example, Bristol-Meyers Squibb, with $20.6 Billion in revenue, had a $260 Million consulting spend in 2008 across Information Technology, Business Advisory Services, Operations Management, Strategy, and Human Resources (Consulting, July/August 2009). According to the Aberdeen Group’s Christopher Dwyer, "By outsourcing contingent labor management…organizations are experiencing numerous benefits... These programs will not only help streamline the entire contract labor lifecycle, but also drive desirable performance while sourcing quality candidates." The economic crisis has forced even the most successful companies to reexamine their most complex categories of third-party spend: When Microsoft rattled investors by releasing a disappointing quarterly earnings report, Steve Ballmer responded that "the company plans to cut travel expenditures by 20%, as well as make significant reductions in spending on vendors and contingent staff." The gauntlet has been thrown, and top-quartile procurement teams are responding accordingly.

The Sun, the Moon, and the Stars Align
When we work with clients, across a wide spectrum of industries and geographies we typically find an environment with limited management of the Professional Services category. Common characteristics include:

• Most companies have many, many more professional suppliers than they realize
• Contracts, statements of work, engagement letters, or other documentation as to what companies are buying, and at what cost rarely exist
• Spend levels double or triple that which is captured in Professional Services categories
  • Capitalized IT Strategy work
  • Misclassification to Temporary Labor
  • Mixing of goods and services
• Clear project timelines, deliverables, ancillary costs, resources, rates, and outcomes are typically not spelled out
• Lump sum invoicing which provides little insight and even fewer actionable opportunities is the norm
• Many companies have multiple “unique” one-off Professional Services contractors (even former employees in many cases) which exacerbate the problem

However, a number of factors are converging to make sourcing and management of Professional Services particularly timely.

• In the marketplace, Professional Services firms are looking to expand their offerings - particularly to clients with whom they already have a working relationship
• Compensation and overhead structures of Professional Services firms vary significantly - and it is not in their best interests to simplify them
• Clients are scaling back broad initiatives - either due to mergers, tight finances or uncertain revenue forecasts; it appears that in many cases they are postponing rather than canceling the initiative
• Considerable pressure exists right now on rates - many Professional Services firms have had staffing "adjustments" in the past six months, and hiring was tempered for the 2009 graduating class (both MBA and BA), and is looking flat for 2010

Solving the Equation
The solution starts with understanding what, from whom, and where we spend our Professional Services dollars, Euros, and pounds (building a classic, but flexible, spend cube) and developing a comprehensive, cross-functional Category Management Strategic Sourcing Approach. In the final analysis, successful companies treat Professional Services as they would all complex category sourcing by:

1. Establishing professional services business requirements to provide the context for category strategy:
   • Category cost/performance objectives
   • Regional vs. global needs
   • Demand profile/analysis by area
2. Performing market analyses to establish the range of supplier-facing category options
3. Using competitive benchmarking to identify and prioritize capability and performance gaps
4. Developing a formal category strategy that:
   • Quantifies objectives (e.g., target savings/performance, concentration, region, etc.)
   • Defines improvement techniques (e.g., sourcing, supplier development, demand management, specification management, etc.) and
5. Triggering category execution activities

The benefits manifest themselves in a Professional Services Category Strategy that is aligned in support of business needs and which is designed to take advantage of market opportunities.

One additional consideration is the increasing role that supply market intelligence (SMI) plays in complex category sourcing. SMI is being formalized as a discipline and is increasing in importance. The rapidly changing capabilities of professional service firms require procurement organizations to be more creative, and effective, in how they build and maintain their supply market intelligence. Procurement Organizations have necessarily moved from secondary to primary research sources and have defined more effective SMI operating models. SMI has become much more of an ongoing (rather than episodic) activity, and leading companies are committing resources to ensure that the organization's information is constantly refreshed to support their evolving business requirements.

Finding and Unlocking Value
Understanding the full range of Professional Services is necessary to accurately benchmark and drive value. Gaining increasing clarity on “what” professional services are purchased across the organization is critical to “finding value”. Leading practices include formally defining what business decisions need to be supported and the information needed to make these decisions and then defining discrete segments that share similar buying behaviors which can be mapped to the supply market, for example:

• Supplier Capabilities (e.g., Portfolio Assessment or Working Capital Reduction)
• Resource Levels (e.g., Partner or Analyst)
• Project Type (e.g., strategy or implementation)

Summary
In summary, Archstone Consulting Research and project experience indicates that Procurement organizations in the Top Quartile of Professional Services management apply a number of common techniques, including:

• Basing their Professional Services Category Strategy on a solid underpinning of facts (spend, requirements etc.)
• Understanding their internal client's operational and strategic requirements
• Staying close to the business/functions on an ongoing basis
• Collaborating with their clients in developing the Professional Services Category Strategy
• Understanding the marketplace - from multiple views
• Refreshing their perspective frequently and adjust the Professional Services Category Strategy as necessary
• Quantifying and measure the value and performance of their professional services

By adopting these Top Quartile techniques, organizations can improve their management of Professional Services and realize significant savings while driving improved performance from the supply base.

Archstone Consulting is a leading independent Strategy, Operations and CFO Advisory Management Consultancy that was founded in 2003 by consulting industry veterans with accomplished track records in all areas of business operations from various industries and leading consulting firms – bringing a strong balance of “real world” insight and strategy-based training. We serve leading global organizations (including 24 of the top 100 companies and 58 of the top 500 according to the latest Fortune rankings). Archstone Consulting is headquartered in Stamford, Connecticut, with offices in New York, Chicago, San Francisco and Amsterdam. For more information about Archstone Consulting, visit our website at www.archstoneconsulting.com.