In our recent white paper The Strategy of Winners we described how economic and market conditions in recent years have forced many organisations to bear down on their use of statement of work (SOW) service providers. However the focus of much of this procurement effort has been to try and reduce the ‘price paid’ rather than increase the ‘value received’.
As revenues, margins, and in some cases, opportunities have shrunk for SOW service providers, one could argue this has been a job well done. But the $64m question is whether procurement functions have ultimately achieved a better understanding of what constitutes best value? Or, in reality, are their organizations merely getting the same outcomes as before, only for a lower price and from fewer sources?
Knowledgeable and effective buyers of statement of work based services know that the balance between price and value is all important. There is always a tipping point in scope/commercial negotiations and this can either have a hugely positive or potentially catastrophic impact on the eventual business outcomes of an engagement.
Chief Procurement Officers (CPO’s) have a crucial role to play in ensuring that their teams understand this and that they are suitably equipped and incentivised to achieve the right balance. For example:
- Lack of genuine knowledge – When it comes to labor based SOW services there is often an insufficient understanding in what is being bought, and consequently what represents value for money. This means that scope/commercial discussions become a game of procurement tactics, rather than an accurate reflection on the complexity or level of effort required to achieve the right results.
- Lack of desire to learn – Typically, buyers don’t conduct sufficient questioning on the content or detail of a particular SOW—this task is almost exclusively left to the internal stakeholder. Of course, it is crucial that stakeholders take the lead on this part of the discussion, but it is often quite striking how little involvement buyers seem to want to have in the process. This could, however, have more to do with the time they have available.
- Lack of resources - Let’s do some basic calculations on consultancy related SOWs alone: even a small buying organisation, spending around $10 million a year, with an average purchase value of $100,000, will leave the category manager with 100 purchases a year to manage. That’s about two potentially complex buys to manage a week before undertaking any strategic activity such as developing a category strategy, or engaging multiple stakeholders and suppliers. The pressure will be higher for those organisations that spend more than $10 million.
Overcoming These Challenges
To help SOW services buyers deliver genuine value, CPOs need to “liberate” them and provide the proper support. A successful approach will involve:
- Applying the right success measures for SOW buyers to help reduce turnover of category managers in the field.
- Winning backing by encouraging buyers to focus on the end-to-end business process for engaging SOW support, not only the traditional procurement bits.
- Resourcing adequately and helping buyers prioritise what they will need to say “no” to. CPOs might also consider being open to more innovative ways of managing the workload.
- Encouraging buyers to learn as much as they can about the dynamics of the organisation and why/when SOW support is typically required, as anticipating the requirements of the business is the first step to earlier engagement.
- Encouraging buyers to join peer networks, for example the MCA Consultancy Buyers Forum
- Developing a challenge mentality by encouraging buyers to assertively question internal stakeholders around what they are seeking to achieve and what commercial/contractual model will best achieve it – they can often blindsided by the urgency of their need.
- Instilling a business focus by encouraging buyers to think as businesspeople who are performing a procurement role.
- Re-educating the supply market around their expectations and approach.
- Providing regular spend and activity reports to the C-Suite, highlighting those engagements which have poorly defined outcomes.
Labor based SOW services represent the largest opportunity for procurement functions to demonstrate ‘business value’ to their organizations. There is no other type of spend that requires as much careful navigation across the stakeholder community and no other type of spend that can illuminate the extent, or lack, of strategic thinking within a procurement team.
CPO’s set the tone. CPO’s set the expectation. CPO’s set the example. CPO’s make the crucial difference to SOW success.