Innovative Procurement of Non-Traditional Services: An Implementation Perspective
Steve Kesinger, C.P.M., A.P.P.
Steve Kesinger, C.P.M., A.P.P., President, The Kesinger Group, Katy, TX 77450, 281-395-1200, SLKESINGER@aol.com
84th Annual International Conference Proceedings - 1999
Abstract. Non-traditional purchasing is an emerging area for involvement by procurement and supply chain management professionals. These are areas that have been typically managed by groups without procurement training, and consequently the commercial focus is missing. By becoming more involved in these areas, procurement professionals can leverage their existing knowledge and skills into other areas, and gain knowledge in different areas of the company. Developing a plan to become more involved in the non-traditional area can be challenging, as we move into "turf" areas typically outside our domain. This paper will address a process to break down these walls and demonstrate the value procurement professionals can bring to the management of these activities. In addition, we will address some effective practices for insuring alignment in your contracting for non-traditional purchases.
Definition and Examples of Non-Traditional Services. The Center for Advanced Purchasing Studies (C.A.P.S.) defines non-traditional purchases as any purchases other than:
- raw materials
- specialized and standard production materials
- M.R.O. (Maintenance, Repair, and Operating) items. Historically, the items noted above have fallen under the purview of the Procurement organizations. These groups are now moving toward leveraging their expertise in more non-traditional areas.
These will vary in differing industries, but some common examples include:
- Travel services
- Software licensing
- Software implementation services
- Legal services
- Employee benefits
- Corporate insurance (liability, property damage, etc.)
- Relocation services
- Consulting services
Typical Challenges of Non-Traditional Purchasing. These items are quite common in the non-traditional buying area:
- Often spread out among many vendors; difficult to track expenditures
- Expenses not always tracked in corporate accounting system (i.e.: travel expenditures)
- Relationships between buyer and seller have been established by others outside procurement
- The value added by these suppliers is often specialized, resulting in loss of buyer leverage
- The "exit" costs (costs to discontinue the business relationship) can be high for the buyer
- Measurement of performance is often difficult to quantify
Cost Drivers for Non-Traditional Services. Typical cost drivers would include:
Labor cost break-down
Equipment and supplies
There are a variety of ways to reduce total cost in the non-traditional services area, and most involve finding synergies and efficiencies between buyer and seller due to tighter relationships and integration.
Developing a Value Proposition for Key Customers and Management. In the non-traditional procurement area, the supply chain/procurement professional is often forging new relationships with both internal customers and suppliers. It is often an essential step to develop a "Value Proposition" that describes the value procurement adds to the process. Some key considerations might include:
- What is our assessment of the current situation?
- What is the customer's assessment of the current situation? Is the need obvious?
- Where are the opportunities?
- Do we bring the skills to generate value for these opportunities?
- If we do not have the skills, can we quickly acquire them?
- What makes us unique?
What Makes us Unique? Procurement/supply chain professionals need to assess how they really add value to the internal customer/supplier relationship. Some examples might include:
- Alliance development
- Acquisition process
- Marketplace intelligence
- Benchmarking/External contacts
- Incentive Contracting
Key Elements of the Value Proposition.
- Statement of the problem (preferably from the customer's perspective, not procurement's)
- Statement of the solution provided by procurement involvement
- Statement of the qualifications of procurement to add this value (past successes, recognition, etc.)
- IF the end user does not initially see a need, propose a "shared risk" option. Pick a small area to work on with the understanding you will assess progress and value added to determine future involvement. Make your involvement as easy as possible on the end user. Remember, in most cases, the supplier will NOT be anxious to have procurement involvement, so end user support is essential.
Dealing With Resistance. One should anticipate possible resistance from the internal customer and/or supplier of the non-traditional services. Some of the common reasons for resistance include:
- Loss of control
- Vulnerability ("Someone may find out I have not done my job as well as expected")
- End user does not see any added value from your efforts
Consider the following approaches to dealing with resistance:
- Recognize the resistance
- Remember "P.H.D." (Preserve Human Dignity) to deal with vulnerability issues
- Move slowly with loss of control issues; build trust slowly and steadily
- Praise previous successes when dealing with vulnerability issues
- When the end user does not see the value added by procurement, prepare a value proposition in advance
- Listen for the customer response
Forming Your Cross Functional Team. Once you have approval to work in a cross functional effort, it is timely to consider what type team you really need. Consider a broader cross functional team with senior management sponsorship for services such as company benefits, corporate travel, office services, and software implementation services. These services impact most employees and must be addressed on a broader basis. Consider a smaller team for services such as legal services, most consulting services, corporate insurance, and advertising services. Because the impact of these items affects a smaller population, the building of a trust-based relationship within the small group is the most critical element for success.
Looking Inside and Outside Your Organization to Assess the "Current State". It is helpful to conduct process analysis for non-traditional services to assess how work gets done currently. Some things to consider would include:
- What is the scope of this process? Where does it begin and end?
- Do we have the right individuals involved to assess the process accurately?
- Are there any boundaries and/or sacred cows involved?
- How much time are we willing to commit to the process analysis effort? Consider external factors as well including economic conditions, impact of technology, regulatory issues, OSHA requirements, etc. This will help you look outside your organization and assess current conditions.
Examples of Effective Practices for Non-Traditional Services.
- Systems implementation: Establishment of a target price based upon resource billing rate X estimated hours: Compensation tied to performance against target price
- Travel Agency Services: Established shared expenses (for on site agents and equipment) and shared revenues (from airline/hotel commissions and override agreements). A portion of the profit to go to the travel agents who are on-site
- Household Move contractor: Established compensation system based upon published rates less discount. The percentage discount was tied to employee satisfaction with their move. Greater employee satisfaction reduced the discount (moving company paid more money) and poorer employee satisfaction increased the discount from list prices. A portion of the incentives paid went directly to the movers.
- Consulting services, legal services, advertising services: Work to tie compensation to provable results wherever possible. This could be tied to settlements gained for trial legal services, to measurable value generated for consulting services, and to increased revenue from advertising suppliers.
Further Areas of Consideration.
- What systems does the travel agency have in place to insure I receive the lowest fare per my corporate travel policy?
- What if I do not receive the lowest fare? Will the agency refund the difference to me?
- Does the agency have existing negotiated fares with airlines, hotels and rental cars? If yes, what are they? If no, do they have the expertise to assist my company in negotiating for these services?
- Does the travel agency have the expertise to help me develop the best travel policy for my company?
- What processes are in place to insure customer satisfaction? (measurement of telephone response time, experience of travel agents, etc.)
- Is the agency willing to share risks and rewards in our contract? Share a portion of their commissions and overrides?
- What management reports are available through the agency? Can they provide customized reports?
- Does the agency have the capability to provide negotiations and arrangements for group travel and conferences? If so, specifically what do they provide?
- Are special agents available to book international travel? What are their qualifications?
Measurement considerations might include:
- Customer satisfaction (survey method; 1-10 evaluation)
- Innovation in reducing overall costs (number of effective ideas)
- Cost per airline mile
- Average cost per hotel night (by major travel cities)
- Telephone response time (how many calls go to voice mail vs. a "live" voice)
- How much experience does the implementation firm have with this particular software application?
- How much experience do the individuals have that will be working on our implementation?
- Have we checked their references? Have we asked for additional contacts from the initial reference list?
- Do we have guarantees that individuals working on our implementation will not be assigned to a different project without our written approval?
- Do we have a well defined scope of work for this implementation? Do we know what the deliverables will look like? What the timeframe for implementation will be?
- Do we have a clear procedure for written approval prior to any changes in scope?
- Do we have agreement on who will pay travel and living expenses?
- Do we have a clear project plan with milestones, timelines, accountabilities, and reporting procedures?
- Do we have contract alignment such that all parties objectives are the same?
Aligning Rewards and Recognition with Your Measurement System. Once you have developed a measurement system that aligns the interests of all parties, you should consider the reward system.
If we achieve our goals, what are the rewards and recognition?
Here are some suggestions:
- Increased business
- Public recognition in the newspaper, trade journal, etc.
- Ability to use customer as a reference
- Joint R&D for future activities
- Ability to "test" new product development with the customer
- Improved payment terms
- Access to core strengths of one another (training, knowledge management, etc.)
In Summary. The non-traditional procurement area is ripe with opportunity in many companies. It provides an opportunity for procurement/supply chain professionals to add value in purchases typically managed by others. Working together with suppliers and internal customers, we can demonstrate our value, become exposed to new areas, and improve performance within our company!