October 20, 2023 | Procurement Strategy
Amid rising labor shortage, several enterprises are today partnering with external service providers to procure specialized services.
But are they benefiting from this arrangement and getting the desired results?
How can enterprises make the best use of services and ensure healthy return on investment?
Let’s begin by understanding the concept of services procurement.
Services procurement involves the requisitioning of people-based services by an enterprise with an agreed-upon scope and deliverables. In other words, it is the strategic outsourcing of labor to a business for a defined purpose.
Workers obtained via services procurement, also sometimes referred to as an invisible workforce, are not part of the organization’s permanent workforce. Instead, they comprise project-based workers such as consulting services, IT services, marketing agencies, accounts payable, facilities management, law firms and others. These are just a few of the critical operational tasks undertaken by service providers on behalf of enterprise clients.
Such workers are managed via a Master Services Agreement (MSA), which includes an agreed-upon service level agreement (SLA) in a set timeline. The agreement between an organization and service provider outlines the scope of work and payments based on the desired outcomes.
Unlike direct and indirect procurement that aim to acquire materials and goods required for business operations, services procurement involves the acquisition of people-based services from external service providers. These service providers offer specialized services in IT, marketing, brand strategy, maintenance etc.
Both procurement of goods and services are important functions and spend categories within an enterprise. But they are often managed by different teams that may use different technologies.
In general, services procurement can be more complex than the procurement of goods and materials. Unlike products that have specific measurements and characteristics, services are dynamic and can be handled in different ways by different people. Services procurement can be subjective and difficult to categorize or commoditize.
Another aspect that adds to the complexity of services procurement is determining the demand or how much is needed. Unlike materials that can be easily quantified, it is difficult to assess the precise requirement for services. For example, what should be the headcount or the number of resources on the project and hours required per resource?
Services procurement has become increasingly critical in today’s labor-hit business landscape, with more and more organizations relying on their external workforce to complete projects faster and help them adapt quickly to changing conditions.
But there are also some challenges in managing external service providers.
While many enterprises focus primarily on the financial aspect such as payment arrangements with service providers, they fail to effectively manage external people who are doing the actual work. For example, do these workers have the necessary certification and training for the job? Do they have access to systems and facilities? How are they progressing against the set goals and deliverables?
Lack of visibility into service providers’ operations often prevents companies from getting the maximum value from their services. This can also impact project timelines and outcomes, which may not align with what was agreed in the service agreement.
Clearly, the stakes are high and there is a need to bring services procurement and spend into the ambit of a structured procurement process.
Considering that service providers today account for a major portion of enterprise spend on external workforce, it is vital for businesses to make the most of this work arrangement and regularly monitor their progress vis-à-vis defined goals.
Among other things, this requires enterprises to look at service providers as an extension of their regular workforce and perform close monitoring. Organizations should also leverage intelligent technology to effectively manage their service providers.
Technology can provide a combined view of all spend — goods and services — in a single, unified platform for better spend management. In addition to visibility, technology can simplify the complex tasks of performance tracking, reporting and analytics.
Automating services spend can also enhance efficiency and simplify invoicing and payment. Additionally, centralizing services procurement can mitigate security risks and ensure service providers comply with all company policies.
A coordinated, technology-driven approach can help businesses capture the maximum value from services procurement and get healthy return on investment.
Finally, executive buy-in is vital for getting the most leverage from services procurement. Leadership support can set the project up for success and ensure proper utilization of services spend.