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June 8, 2017

Two Sides of Hired Services Procurement

Two Sides of Hired Services Procurement

I recently wrote about the differences between product and service procurementfrom demand to specifications, and technology to relationship management. But as I pointed out at the end of the post, the idea that “services procurement” is one thing vastly oversimplifies this broad category. Perhaps that is part of what causes product specialists to shy away from services procurement.

Many people – even career procurement professionals – would rather source any product under the sun than touch a services category. Services are “messy.” Services don’t fit well into our templates. And it just seems weird to precisely detail specifications and requirements that are to be met by a person rather than a product.

That said, services represent a huge portion of the spend that procurement is tasked with bringing under management. The opportunity is too large and the negative impact of unaddressed risk is too great to let services spend escape the rigor of a structured procurement process.

I am proud to say that I have a specialization in hired services, getting my start in procurement focused on services sourcing for a large grocery retailer. How I got to that point says as much about services procurement as anything else. I was “absorbed” into an indirect sourcing team with little notice and absolutely no experience in procurement at all. There was a fair amount of discussion about where to put me. The long and short of the story is, I ended up dedicated to hired services because I was the new kid and didn’t know enough to demand assignment to another category. After all, why else would anyone accept a lifetime sentence of hired services procurement?

Well, the joke was on them and the advantage all mine. Not only are services far less scary (or messy) than they are reputed to be, but even “indirect” hired services are much more closely linked to the operational center of the company than are many of the product categories.

Because I worked at a grocery retailer, I managed a “colorful” set of hired services categories (pest control, anyone?), but I lived to tell the tale. In this blog series, I will share some of the lessons I learned working in location-based and corporate hired services.

Establishing Services Demand and Requirements

As I mentioned, one of the hurdles for procurement to overcome in managing hired services is how different the demand levels and specifications/requirements seem. Volume is measured in hours, and demand is expressed in frequency as well as how many people are needed at a time. Requirements (the equivalent of specifications in a product category) establish the qualifications of the people who will do the work and the outcomes that must result from their effort. The demand and requirements for location-based hired services may vary by location; whereas with corporate services, they are more likely to be associated with each role included in the services category – not unlike a series of brief job descriptions. And, as Julien Nadaud pointed out in a recent Determine OutLoud podcast, “Getting agreement with a third-party contractor to do something for you requires a mix of services, people, delivery and scheduling. That is where the complexity of being able to address everything becomes an issue.”

Case in Point: Snow Removal Services

The supermarket chain I worked for had hundreds of locations throughout New England and the Atlantic states. This meant that snow removal was not only critical, it was very complicated. We had to establish “depth triggers” for when the plows were to roll, as well as the relationship between snow depth and pricing. Some of the locations were close to residential zones where equipment could not be on-site outside of pre-established hours. Others had no place to pile the snow and needed it to be hauled away or melted on-site. And regardless of how big the buying company is, with a service like snow removal you are likely to be working with hundreds of individual plow drivers, increasing the complexity of the effort and the hands-on management time.

Systems Requirements

If I’m making the case (which I am) that services can be managed just like products, it makes sense to think through the specific requirements that will arise when it comes time to leverage eSourcing. As “simple” as location-based hired services might seem, they are anything but when it comes to selecting the most cost-effective combination of providers. Hundreds of suppliers may bid, but few will have the ability to cover all locations. Multiply items (locations) x data points (bid fields) x demand (services’ frequency) x bidding suppliers, and it quickly balloons into an optimization scenario that goes far beyond what spreadsheets can handle. Corporate services may not require heavy lifting from an optimization standpoint, but they have their own eSourcing needs. Many services are bid on a cost-plus basis, meaning that the salary paid to the person is not negotiable (because it would compromise the quality of the work) but the margin charged by the providing firm is. Procurement will want to be able to separate those data points per job and supplier.

Case in Point: Setting Hourly Rates

It is not uncommon to establish (narrow) ranges of pay for each role in the service category. Procurement can start with the agreed-upon rates in existing contracts, but this is an opportunity to get valuable feedback from new prospective suppliers. Let them look at the qualifications and responsibilities associated with each role and comment on the salary ranges. Are they too high? Too low? What is the potential upside of paying a bit more per hour and what is the advantage or risk associated with reducing the hourly rate? Take their feedback into account before the RFx is issued for bid.

In the next part of this series, I will discuss the additional opportunities and cautionary areas associated with location-based and corporate hired services.

Determine has designated June as Services Procurement Month, which culminates with a Forrester webinar on June 22 at 1 p.m. ET / 10 a.m. PT. Along with my blogs on the topic, you should also check out Julien Nadaud’s OutLoud podcast and two guides from Spend Matters.

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