Services Spend Savings Largely Untapped

Services loom large in total spend, but enterprises just starting to tap potential process savings, CAPS finds

Tempe, AZ  December 10, 2002  Large organizations spend on average 58 percent more on services than they do on indirect materials, presenting enterprises with the opportunity to extend the benefits of e-procurement to this significant segment of their total spend, according to the results of a new survey by the Center for Advanced Purchasing Studies (CAPS).

The survey of 115 organizations across multiple industries, conducted by CAPS in conjunction with professional services e-procurement specialist Elance, revealed that services spend constitutes, on average, 33 percent of an organization's total spend, coming in behind direct materials (51 percent of total spend, on average) but ahead of indirect materials (21 percent). The total exceeds 100 percent because more respondents were able to break out direct goods than services or indirect goods, according to CAPS.

The average total purchasing for the organizations surveyed was $2.98 billion, with services purchases averaging $985 million annually. Services spend as a percentage of total spend ran as high as 86 percent.

Despite the slowing economy, the benchmark report, titled "Defining and Determining the 'Service Spend' in Today's Services Economy," found that organizations expected to spend increasing amounts on services in contrast to general spend contractions. In fact, more than one-quarter of all respondents indicated that their total spend for services would increase by 10 percent to 50 percent.

But while services loom large in companies' overall spending, organizations' capabilities to source, procure and manage services as part of larger supplier relationship management (SRM) efforts lag significantly behind goods procurement.

For example, the researchers found that purchasing departments have less control over services spend. Of the 39 service categories studied, there were only three categories where more than 50 percent of the respondents indicated that purchasing "managed, controlled or otherwise influenced" spend. For the other 36 categories of services  including telecommunications, temporary staff, facilities management and information technology  purchasing did not control the procurement spend.

Moreover, CAPS found that maverick spend on services averages twice what it is for direct goods and 40 percent higher than indirect goods. In addition, purchasing organizations must manage more supplier relationships with services than in other areas: companies reported 74 active suppliers per purchasing employee for services, more than twice the number of direct goods suppliers and 20 percent higher than the number of indirect goods suppliers.

Given these findings, it perhaps is not surprising that CAPS also found that organizations are pursuing new means of buying and managing services. Organizations reported an increase in the amount of services spend that was being processed through various e-commerce applications, including a 7 percent increase through enterprise resource planning (ERP) systems; 39 percent increase through e-procurement systems; and 77 percent increase through reverse auctions.

"Having spent hundreds of millions of dollars on e-procurement systems designed to streamline spending on indirect goods, enterprises are now realizing that spending on services represents an even larger opportunity for cost savings and efficiency improvements," said D. Steven Wade, director of benchmarking for CAPS Research.

Tim Reed, vice president of product strategy for Elance, which sponsored the study, suggested that organizations can gain significant benefits by improving the way they buy and manage services, including lowering the cost of services and improving the quality of the services received. "Improved control and visibility over services is a critical need in today's extended enterprise," Reed concluded.

For more information on professional services procurement solutions, see the article "It's All About People," the Net Best Thing column in the January 2002 issue of iSource Business.