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June 1, 2017

The Differences Between Product and Services Procurement

The Differences Between Product and Services Procurement

In a recent episode of the OutLoud podcast series, Serving Up Services Procurement, Determine’s Chief Product Officer Julien Nadaud summed up the differences between product and services procurement in one neat statement: “It is very difficult to put services procurement in a box.”

For all of the perceived differences between product and services procurement, that is really what it comes down to: not being able to put people in a box. The “outside of the box” characteristics of services affect some of procurement’s most essential strategies and approaches in a material way (pun intended).

Demand

One of the most fundamental questions procurement will ask before sourcing any category of spend is, “How much do we need?” Depending on the product being purchased, demand might be expressed as a count, a weight or a volume, but the connection between the projected output and the number of items required is usually very clear. Not so with services. Unless the services in question are covering specific hours of the day, the number of resources or hours required are likely to be associated with a desired outcome. Making the leap from that outcome to headcount – let alone specific skills and qualifications – requires a deep understanding of the service and the value it offers the business.

Specifications and Requirements

Speaking of skills and qualifications, these are probably the most difficult part of services procurement to fit into Julien’s “box.” Products can be precisely measured and therefore precisely described. They have a specific weight, color, material and composition. And while it might seem that  documenting the specifications and requirements for services is akin to writing up a job description, the person delivering the service may never set foot in your office or meet your team. They will not have the opportunity to observe and learn, but must still perform the tasks and generate the outcomes the company needs.

Contracts

All contracts contain similar elements: costs, payment and delivery terms, SLAs, guidance for dispute resolution, etc. In the case of services procurement, however, the structure may be very different than with product categories. There will possibly be a Master Services Agreement (MSA) that serves as the basis for multiple Statements of Work (SOW[s]). This reflects the fact that the service in question is defined broadly at first, followed by multiple detailed project-like agreements that define the outcomes, work expectations and timelines. Both the MSA and SOW(s) will be needed to connect the upstream contract to downstream delivery.

Delivery

When a product is purchased, either procurement or someone else in the organization can literally handle  it. There is no question that the item has been delivered. The evidence of services delivery comes in a different form: perhaps it is the appropriate hourly coverage or clear proof of an objective-driven outcome. Even when the evidence is clear, procurement needs to maintain visibility into who performed the service to ensure that the right person (billing at the agreed upon rate) did the work. This also has to tie directly back to a contract — are the terms and obligations being met?

Quality Assurance

Fortunately, quality is often as clearly visible with services as with products. When a job is not done right, everyone knows it. Dealing with missed quality expectations, however, is far more complex with services. When there is a quality issue with a product, the conversation between procurement and the supplier is likely to be about precision, machine operation and pre-delivery inspection. With services, this conversation feels more personal – more like a Human Resources issue. The quality issue is not a missed measurement or poor packaging, it is a person who  was either not qualified or did not apply the required effort. The initial conversation about service quality, and ongoing performance management, will require additional sensitivity and effort on procurement’s part.

Technology

Both product and service categories benefit from the use of procurement technology, although they may lean more heavily on different parts of the functionality. To a certain extent, product categories benefit from the consistency that software drives. Unfortunately, when applied to services procurement, “consistency” quickly becomes “rigidity” – a deal breaker in terms of value creation. Only the most agile platforms, and the appropriate subsets of their functionality, are likely to be applied with good effect to services categories.

Supplier Relationship Management

Nearly all procurement efforts seem to be more relationship-driven these days. Having effective relationships with suppliers is the result of well-managed communications and clear expectations, and ideally leads to higher satisfaction on both sides. In product categories, the relationship is usually in addition to the product delivery, while in services procurement the delivery often is the relationship. All parties involved in a services contract must make a conscious effort to separate routine working relationships from account management relationships if they are to achieve their intended purpose.

As Julien offered up in the podcast, “When you talk about services it is much more complex because the process is completely different.” We talk about services as if they are one thing, but in fact, this belies the range of capabilities and outcomes associated with service providers. As Julien states, “You can’t buy people the same way you buy products.”

In the next two parts of this series, I will share my experiences with services procurement – making the case that while they are not the same as product procurement, they are every bit as addressable.

To learn more about the challenges and solutions inherent to services procurement, download these two Determine-sponsored reports from Spend Matters.

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