By Seth Wolins of Emptoris, Inc.

I recently presented at the SIG Leadership Summit in San Diego, along with Michelle Hawkins, the Vice President of Procurement at Motorola, on the challenges of sourcing outsourced services and contingent labor. 

Regardless of whether a company outsources to lower costs, to provide scalability, to access greater expertise, or simply to focus on core competencies, outsourcing has become a way of life in global business.  As with most business development trends, there are both opportunities and challenges that result.  As global businesses rely more on outsourced services, associated risks increase and new management challenges arise. 

In less than a decade, outsourcing has transformed into a critical management tool and a critical management challenge.  Yet with these challenges, solutions have emerged.

Coming from a technology and global operations background, following the SIG Leadership Summit session, I was besieged with questions specifically about the application of services procurement solutions and vendor management systems (VMS) – and specifically what to consider when evaluating these solutions.

My response typically is that the most important factor to consider is the long-term.  That is, the long term or strategic direction of one’s services procurement and management program.  All too often, companies start with a limited view of the scope of their challenge and the company’s outsourcing strategy.

A typical Global 2000 company starts applying technology to outsourced services procurement with the contingent labor category.  I would estimate that close to 20% of the Global 2000 currently are using some form of services procurement or VMS solution to help procure and manage their contingent labor program.  More often than not, compliance demands drive this – including legal, financial and operational compliance demands.  And, more often than not, the Human Resources organization drives the initial call for a solution.  Only at a later point do sourcing and procurement organizations tend to get involved.

Once a company has a handle on contingent labor, Procurement or Finance begin to understand the value of such a solution, and there typically follows an appetite to expand the solution’s usage to apply to other outsourced services, such as IT services, consulting and real estate.  Considering that the estimated range of savings is between 5% to 15% for contingent labor managed via VMS, it’s easy to see how programs can expand quickly. 

Too often, the program is developed and driven by one local organization’s needs and plans for managing contingent labor, without a longer-term examination of the company’s broader, strategic needs in managing a range of outsourced services. 

Depending on the industry, it is estimated that spending on outsourced services accounts for between 30 to 60% of total corporate spend.  Whether it’s IT, legal, accounting, real estate, facilities, marketing and printing, or any number of types of consulting work, the number of categories and the demand for services management is enormous at most organizations. 

Companies spend 3x to 5x on outsourced services then they do on contingent labor, thus when addressing contingent labor challenges, it seems critical to consider the application’s ability to address broader outsourced services.

One of the great myths is that all service providers have unique expertise.  The truth is that most services are commoditized.  Of course, there are plenty of exceptions but, by and large, services in our economy are commoditized.  Think of sourcing IT maintenance, there are literally hundreds of firms from which to choose.  While most service companies purport the opposite, I would say that 80% of services are commoditized, and just 20% are unique. 

The point is that services procurement is leveragable, and in the current economy it is highly leveragable.

Another point to consider is that although Procurement organizations generally tend to do an excellent job of negotiating services contracts, the service providers do not always live up to – or fully comply with – the contract.  Thus, any program should ensure that robust services procurement solution functionality to assist in the management of service providers and compliance to the terms of the contract is in place.  VMS and services procurement technologies vary widely enough that not all solutions provide such capabilities.  

This is particularly important given the fact that companies are increasingly turning away from time-based compensation to Statements of Work (SOWs) in outsourced services, particularly in the IT and consulting sectors.   A technology solution that also offers capabilities to manage SOWs is a long-term asset.

What else should one consider?  Does a solution support more than just contingent labor?  Can the solution handle complex outsourced services which could include milestone based payment?  Does it handle all categories of services?  Does the solution support global programs and outsourcing?  Does it support global languages, localizations, legalizations and currencies?  The list goes on, but the goal is simple, to look at your global corporate structure and long-term strategy when you begin to address the challenges of procuring services.    

The opportunity for savings and improvement is significant.  Just 1 in 5 Global 2000 companies are currently using services procurement technology.  Of that, just 1 in 5 have evolved their programs beyond contingent labor to an array of outsourced services.  Yet, just a 5% average savings on outsourced service spending can generate tens of millions of dollars in bottom line savings for a $1 billion company. 

So, as your reliance on outsourced services increases, and as your company evolves in its development of services sourcing, I encourage you to take the long-term view.  

Seth Wolins is General Manager for Services Procurement at Emptoris (www.emptoris.com), the supply and contract management software company.  The Emptoris Services Procurement Solution is the market's most widely-used contingent and professional services procurement solution.  Contact Wolins at swolins@emptoris.com