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Is Service procurement a Big Challenge?

I was in a discussion with one of the customers for ERP Implementation and their main focus in implementing the procurement module was to achieve savings and the concern area that they identified was Service Procurement, so that thought created some anxiety in me why customers have started thinking on Service procurement to have an insight how service procurement can be managed.
In recent times spend on service procurement is growing day by day and hence it is gaining attention and so the procurement managers wants more visibility in service spending, compliance to savings target and want to collaborate with suppliers for achieving effectiveness in performing better. So service procurement can be defined as one of the key elements in managing resources which have complex categories like maintenance activities, contracted labors, IT services so the challenge here in such kind of service procurement is undefined quantity, duration and after consumed the price is known and deliverables are all based on time based and milestone based which becomes difficult to quantify with the framework of service procurement as the business priorities and goals have to be met, by collaborating with different business lines and having an effective supplier management which can drive values and savings and have a seamless end to end processes.
If services procurement is handled ineffectively it may lead to following situations:
1) Poor visibility - A decentralized control over services spend can lead to poor visibility of suppliers leading to throttled relationships in business
2) Adhoc purchases - Maverick purchases for appropriate resources can lead to unauthorized suppliers being on boarded
3) Disintegration of manual processes - There could be some manual process that are not integrated which may lead to slow processing of purchasing documents
4) Less Savings - As for poor visibility the savings opportunity is not captured
5) No clear visibility of suppliers - Suppliers don't get completely involved in the business definitions and procurement processes leading to ineffective supplier collaboration
So what could be an appropriate approach to address these issues that are faced in service procurement to add value to the business?
1) Centralized Management - With different service categories available there can be centralized control which will give a top view of different categories purchased
2) Supplier Collaboration - Making suppliers apart of the business by collaborating them in business processes like bidding, confirmations and invoice management
3) Realized savings - Reduce the cost through identified entities
4) Automated processes - Many manual processes can be automated giving the buyer for time to spend on analytics
5) Acquiescence enforcement  - Proper enforcement of compliance for negotiated rates and supplier confidence
These are the drivers for enabling business value like:-
1) Aggregation of demand and increasing of procurement power
2) Providing easy to use tools for both the employees and the suppliers
3) Having visibility of spend on services
4) Mapping complex business processes
5) Usage of best practices centrally to increase the compliance level
I hope some questions are answered we will also have an insight in my next blog of how SAP SRM has enabled service procurement in all new way.


I think that service procurement is not complex as it is made to be. There is no doubt that there has been percent increase in services procurement across organizations with the advent of outsourcing but even today the percent spend on services compared to the total indirect procurement is pretty much low. I think that only now focus has been on services procurement and naturally IT solutions are being fine tuned around this. What is true as stated by Nilesh is holds good for all category of items as well. I think the real challenge will be find the wrong business rules in services procurement and even tougher will be find the right business rules. This is because business rules for services procurement tends to be very localized.

Both you and Sathya are correct. Services Procurement is not "rocket science". However,the challenge we see with indirect services is that procurement professionals apply direct commodity strategies and processes against indirect services. This is where the disconnect occurs. It is different enough that it requires a slightly different approach than the direct commodities. We see many manufacturing firms that are proficient in the acquisition of direct goods but have not ever, in the history of the company, looked at indirect, and when they do, the opportunity is startlingly large.

You are absolutely right. I have been working for years in the consulting industry in Europe and services procurement is one of the most grey areas in procurement. Not only because of the difficulties on tracking deliverables, time frames, resources and results, but also because of the difficulties of conducting service provider comparisons. That without talking about fraud, both within the private industry or the public administration, which comes in terms of services in most of the cases.
The only way the enterprise (and public organizations) has to tackle with this problems, which you have described perfectly in points 1 through 5 is to bring visibility into the information that it has of its suppliers, and again, the solutions of centralized management, supplier collaboration, automated process and enforcement of compliances are the best approach to it.
I also agree with Sathya when it is said that services procurement business rules tend to be very localized and here I will challenge Nilesh to show how SAP SRM fully tackles the problem. It only tackles a very tactical aspect of it. The real solution is have upfront visibility of when anyone from the business requests new suppliers, rather than procurement always working on chasing things after the fact.
After working in the matter for several years, I have not seen any ERP capable of tackling with this issue, thus, forcing big corporations to find other solutions (i.e HICX Enterprise Supplier Manager)
Only by centralizing the supplier onboarding process and bringing full visibility, service procurement maverick spend and disintegration of manual process will be reduced effectively.
Sergio Mateo

This is in fact a wonderful post, the piece of writing has really allured me, and you have given a definite idea of this issue. Nice !!

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