Unleashing the Potential of Services Procurement and Management (SPM)

Abstract: By Peter K. Punwani, Infosys Technologies Limited

Services account for 50% to 65% of the non-fuel spend in most electric and gas utilities. From IT contracting to outage management and line construction, services represent an area that has traditionally remained unaffected in supply chain automation efforts. Todays new internet-based technologies offer exciting opportunities for process innovation and cost reduction. No wonder that more and more Fortune 500 companies are implementing Services Procurement and Management (SPM). What can we learn from the early adopters of this new technology? Is there a recommended approach to unleashing SPMs potential in the Utility industry? That is the subject of this paper.1 I. Introduction: Most supply chain executives have revamped their procurement and supply chain processes and systems in the past ten years. This has resulted in lower inventories, better collaborative planning with suppliers for items like poles and transformers, improved lead times and created leaner organizations, while enhancing customer service. Going forward, improvements in the materials supply chain are expected to be modest. But, in todays brutal economy, the pressure for further cost reduction is relentless and immediate. Fortunately, a relatively large and untapped area for cost savings is emerging - services. As opposed to materials or products, services typically account for about 50% to 65% of the non-fuel spend in most utilities. With more and more work being outsourced, this percentage is expected to keep growing. Yet processes for managing services remain archaic, manual and fragmented. They vary all over the company and are typically complex with very little cross-organizational visibility of spend or performance statistics. Little wonder that while most supply chain and financial executives understand their inventory statistics to the decimal point, they struggle with knowing what their total spend is on services; leave alone the details within a service category such as management consulting, overhead line construction or supplemental engineering! Without such visibility, they find it difficult to apply the normal techniques of spend management, strategic sourcing, vendor consolidation and performance improvement that helped them squeeze savings from the materials supply chain. New internet-based solutions over the past two years have emerged to tackle some aspects of services. Early pilots have shown savings of anywhere from 8% to 30% in areas such as IT contracting. Yet mere systems implementation has never been the panacea for meaningful and sustained cost reduction - as any supply chain executive can attest based on prior experiences with ERP and eProcurement! By the same token, burying ones head in the sand and ignoring the services opportunities, immediately available to the competition, will not pay in todays economic conditions. There is no doubt that services represent a huge opportunity for cost savings and profit improvement - not only in the Utilities industry but with almost any Fortune 500 company. Companies like Capital One, GE, Citibank, Bank of America, Duke Energy, Entergy, First Energy, FPL Group, Shell, AIG, Verizon Wireless and others are leading the charge to reengineer their services supply chain as a fundamental way for improving their bottom-line and staying alive. For our definition, we refer to this overall area of procuring and managing services as Services Procurement and Management (SPM). It includes the processes and information flows for requesting, sourcing, procuring, managing, paying and analyzing data for all services purchased by the company. These services can be classified into three categories:

Time and expense based services (e.g. IT contracting, outage supplemental labor); Project-based services (e.g. turnkey consulting projects, facility additions); and Ongoing services (e.g. vegetation management, call center outsourcing). II. Issues faced in addressing services: It has traditionally been difficult to get a handle on services. Typical issues that most utility industry executives face as they look at services are as follows: Poor spend visibility across the company for services. No clear owner for direction and accountability. Characteristics of people are different from materials. Purchasing involvement is limited. A plethora of suppliers across the company. Different prices paid across the company for the same or similar services. High level of maverick buying. Processes are manual, disjointed and slow with multiple handoffs. Processes vary widely between business units and service categories. Performance measures are lacking. Poor on boarding and off-boarding practices. Co-employment and liability risks in the use of contractors. Pricing inefficiencies. Long and cumbersome payment processes. Decision-making information unavailable to key managers. Typical ERP solutions dont address services. eProcurement systems rarely address services. Poor collaboration within and outside the organization regarding the services processes. III. Emerging Solutions: Several Internet-based software providers have emerged in the past two years in this area. Generally speaking, services occupy a hybrid space between traditional supply chain solutions and human resources solutions - given the unique flavor of people based services. The early solutions were specialized solutions that focused on either the front-end collaborative strategic sourcing process (request, source and procure processes) or the back-end settlement processes (manage, payment and analyze), and in some cases addressed the full cycle.

Exhibit 1: Example of an internet-based solution for contingent labor

Request Source Procure Manage Settlement & Payment Analyze

Services requirements Requisition creation Standard roles, competency inventory, rate sheets Requisition approval

Real time supplier collaboration Source internally Source from preferred suppliers Sourcing transaction history from requisition to fulfillment Sourcing status Online resume submission & review Interview & offer process tracking

Auto generated work order Work order approval & workflow Electronic Submission to preferred suppliers

T&E entry T&E approval Auto generated invoices

Electronic settlement Electronic bill present and payment Fully integrated with AP and AR

Standard reports Custom reports Analytics such as supplier fill ratio, supplier breakdown, contract quality, etc. In-house fulfill versus outside source

Exhibit 1 shows how todays internet-based solutions help automate and streamline the typical contingent labor process all the way from Request to Analyze. This example of a software solution represents a very significant step forward from current processes in most companies. These current processes are almost never on a common database, suffer from multiple handoffs and rarely have any performance statistics available to monitor effectiveness. By moving to the more integrated, automated processes described in Exhibit 1, organizations have got significant savings. These savings have resulted from: Reduced maverick spending (from approximately 35% on the average to less than 5%). Standardization of specifications and rates. Supplier reduction. Process efficiencies (ranging from 25% to 60%). Improved strategic sourcing through better information and online collaboration. Reduced accounts payable process lead times (from an average of 45 days to 2 days). Improved planning and supplier collaboration. Improved contract management with better and timelier information for management. Improved performance metrics (spend, rate, quality and lead time statistics). The early focus of such solutions has been on IT contracting, and to a lower degree on other contingent labor services. A shakeout of competing solutions has been underway, weeding out some of the weaker players. To address these varying requirements, a number of different software solutions have emerged including: ASP offerings (e.g. Elance/CascadeWorks, Fieldglass, Peopleclick, Chimes, IQNavigator, White Amber). eProcurement suppliers with alliances (e.g. Ariba, CommerceOne). Free offerings by staffing firms trying to become one-stop solutions. Enterprise-wide solutions that integrate SPM software with procurement, accounts payable, general ledger, eProcurement and human capital management solutions (e.g. PeopleSoft). Some of these solutions do a good job with contingent labor, but need integration with the ERP software. Beyond time and expense categories, some providers claim to have solutions for project-based work and for ongoing services - these are in their earliest stages of infancy. Enterprise-wide integration is critical to achieving the links to supply chain, financials and human capital management solutions - that make services more complex. The nature of configuration, pricing, current policies/practices, quality and availability of resources is much more variable for more complex services. But there is no doubt that quick-hit savings can start rapidly with todays technology, while more complex services are gradually addressed by a combination of process and technology improvements. Performing a well-structured requirements analysis highlights key gaps for each vendor, based on the types of services being considered. Some organizations have taken the Managed Service Provider (MSP) path to embark on their IT contracting pilots and for some other contingent labor categories. Essentially they have outsourced the sourcing, procurement and settlement process to an outside firm that handles and fulfils the requests for time and expense based services. There are positives and negatives with such an approach. One executive commented, We really dont know what we are saving, as there were no benchmarks in our manual processes before we got started. The need for measuring such benchmarks, regardless of in-house versus the MSP route cannot be overstated.

For an organization considering getting started on SPM, a number of creative alternatives should be considered and evaluated including vendor-specific, vendor-neutral, vendor-pay, managed service provider, enterprise integrated and stand-alone solutions. In thinking through these alternatives, it is important to take a strategic as well as tactical approach to the opportunity. Such an approach ensures quick hit savings to show early results, while ensuring that the larger area of total services is addressed in a meaningful time horizon, without reinventing the wheel for each type of service. IV. Opportunities for cost improvement: Exhibit 2 illustrates where some leading firms have experienced savings through the application of integrated solutions for services procurement and management. It may be observed that while sourcing savings are indeed significant and impacted by purchasing and business unit service users, the back-end savings through the planning, payment and contract management processes are equally important - and heavily influenced by the business unit management staff.

Exhibit 2: Savings achieved by leaders in SPM for contingent labor

Process savings

Spend savings

25 - 60%
Streamlined processes

8 - 20%
Better sourcing savings, reduced maverick spend

2 - 10%
Improved planning, payment & contract mgt.

No company has achieved the upper limits of these savings by merely installing the software or ASP solution. The real savings have been a bi-product of careful planning, in-depth process analysis and sound performance measurement (of the as is and to be processes), changes in practices championed by top executives, sound strategic sourcing and strong collaboration across the supply chain. But the system has been a key ingredient for allowing the processes and their performance to become far more visible, repeatable and controllable.

V. Pitfalls to avoid in implementing SPM: Savings vary from company to company. Our research into their collective experiences and into those of some other companies contemplating SPM implementation offers some lessons learned. The ten most common pitfalls that should be avoided are: 1. A narrow tactical approach leading to sub-optimization and inadequate buy-in at the executive as well as process owner level. 2. Lack of clear vision and sponsorship for the project. 3. Poor project planning and inadequate budgets/staff for meeting ambitious savings goals. 4. A narrow definition of what constitutes services - sometimes limited to contingent labor. 5. Technology focus without paying attention to the business case, process transformation and change management needed for success. 6. Siloed solutions that create integration issues and prevent expansion into the broader service categories. 7. Analysis Paralysis where the business case takes forever and sponsors lose interest. 8. Inadequate performance benchmarks to assess improvement potential and measure results. 9. Waiting for the perfect system that can address all needs. 10. Lack of proactive planning for change management. VI. Building and implementing the SPM solution: Getting an SPM initiative underway is typically difficult. Were in our third generation of ERP systems. Our processes are mature. Why change? one company executive asked. Working together with the process owners, we did an in-depth mapping of the current processes in three selected contingent labor categories across the distribution, generation and nuclear business units. Having analyzed the processes in detail, it became clear just how variable and disjointed they were. The handoffs were incredible! Performance measures were almost non-existent. We painstakingly collected the rate information and other statistics from manual records - it showed a telling picture. When the stakeholders of the processes saw the results of the compiled data and got a glimpse of the to be model (shown in Exhibit 1, and adapted to their situation), the potential for improvement became very clear to them. They helped create and sell the SPM business case to their management. Procurement does not always control the purchase of all services. In quite a few cases, as much as 30% to 40% of the services purchased may bypass the procurement function. For real change to take place to ingrained habits, a company wide focus on organization, policies, processes and culture is critical to success. Finding a sponsor for the effort, who has strong credibility with the top management group, is a key to success. It pays to have a structured approach for implementing SPM. Without such an approach, many companies have floundered for months in trying to define just what they want to do. This leads to a heightened risk for taking a tactical approach based on an executive mandate or a slick vendor presentation. Such a tactical approach can sidetrack the benefits and potentially create siloed solutions that further fragment the services processes, and create disillusionment in the organization.

Exhibit 3: Structured four phase approach to SPM implementation

SPM Blueprint
Proof of Concept Pilot Rollout Implementation

Business Process
Analysis & Reqts Def.

Solution Formulation Business Case Implementation

Strategy

Select technology Feasibility testing Process

transformation

Full scope
implementation

Deployment of full
solution

Executive Alignment

Ensure BU buy-in Pick Pilot areas

Measure results Fine tune process Fine tune

implementation plan

Address multiple
services

Education Sourcing Teams Measure results

Program Management/Change Management Benefits Realization Exhibit 3 illustrates a structured approach to implementing SPM that has been successfully used. It is based on four phases: 1. SPM Blueprint - involves the preliminary business analysis resulting in a business case and implementation strategy. It is an important step in gaining the executive alignment and grass-roots support to launch the initiative. 2. Proof of Concept - involves selection of the technology/process solution and testing of the to be business model with buy-in by key stakeholders. 3. Pilot - involves implementing the Pilot solution for selected service categories with full fledged process changes, testing, training and support. Processes, performance, systems and expectations are fine-tuned as part of the results of the pilot implementation. 4. Rollout Implementation - involves rolling out the solution (with specialized training and support) for remaining categories. Throughout the four phases there is a strong need for continuity in project management and change management. Also there needs to be a well defined approach to benefits realization which starts with selling the business case and ends with measurement of actual results. The fully implemented services solution provides purchasing and supply chain management with the right handle on services, just as it does for materials. This is a key aspect of being able to analyze spend and performance data for better strategic sourcing and contract management. It results in the carefully considered implementation of a variety of strategies such as supplier consolidation, enhanced partnering arrangements, in sourcing versus business process outsourcing, etc. VII. Getting started with a services blueprint: Many companies struggle with how to get started with unleashing the potential from this area of services procurement. A practical first step is the development of the strategy - the SPM blueprint. It results in establishing a vision that everyone in the organization can rally around and from which real progress can be tracked. Such a strategy has to involve not only key sponsors of the project but also key stakeholders in the business units, supply chain, purchasing, accounts payable and supplier communities. The SPM blueprint must address all aspects of the SPM strategy including:

Spend Analysis and Strategic Sourcing - Examine organizational experience versus leading practices, along with spend analysis data and market data for key services. Group services into meaningful buckets from an implementation perspective. Policies and Processes - Examine policies and perform process analysis for pilot service categories to examine opportunities for improvement. Address in-house versus MSP possibilities. Strategy and Organization - Examine organizational structure, executive sponsorship, expertise and culture environment to formulate a winning SPM strategy and gain executive/stakeholder commitment to the effort. Technology - Evaluate options (e.g. ASP hosted, ERP offerings, integration issues) and identify system requirements for short-term and long-term implementation. Exhibit 4 illustrates how the SPM blueprint comes together. A credible business case and a realistic implementation strategy are key outcomes of this SPM blueprint, which forms the first phase of implementation in the four phase structured approach, as described in Exhibit 3.

Exhibit 4: The SPM blueprint development process

Spend Analysis & Strategic Sourcing

Lev el 0No Focus roduNew Dev elo pmeD eman d D e m a n d C h ai e m a d a i Lev el IFun ction al Focus Lev el IIEnterpis e Focus l III LevP artn ershi p Focus l IVLev Su pply Ch in Focus CreationOr dMan ag ement & Cu tom

Build Executive/Stakeholder Commitment

S u p pl y C h ai n u p ply h ai n

S erP rocuremeRe ceiic en g t & P roductionMa na geme nt P roductDi tri ut io n

Policies & Processes

A B C D Time

SPM Strategy & Organization

Findings
Service categories Pilot processes Performance benchmarks Improvement potential

Develop approach
Business Case Implementation strategy

Technology

The business case provides a clear vision of the costs and benefits associated with the total initiative. This is essential for the type of cross-business unit and cross-functional sponsorship needed for a successful SPM effort. The implementation strategy addresses both quick-hits and the longer-term services solution, as illustrated in Exhibit 5. Such a strategy should address all types of services, while taking the reality of current solutions into account. A definitive approach to generating rapid savings is essential and practical.

Exhibit 5: The SPM blueprint drives the implementation strategy 7

Immediate Impact
Institutionalize Strategy & Process

Sound Investment

Exploit

Build Future State Technology Platform

Support & Enable The Core Business

Time

VIII. Conclusion: As purchasing and supply chain professionals we have a done great job of squeezing savings from the materials supply chain. We are at the dawn of a new era in tackling the relatively untapped area of services. The lessons of the pioneers in this space show us that we too can produce dramatic results. We dont have to wait for the perfect solution. Our current services supply chain processes are obsolete! Let us move aggressively forward to implement the quick hits that will get us improved costs and customer service today. Let us build on the lessons in developing more productive, reliable and repeatable processes - that will take us to the next level of supply chain excellence. About the author: Mr. P.K. (Peter) Punwani provides consulting direction to the Utilities Industry Practice of Infosys Technologies Limited. Prior to joining Infosys, Peter was a Managing Director at PwC Consulting (now IBM) and a Vice-President and Partner with Computer Sciences Corporation (CSC) in their Energy/Utilities practice. During his 20 years in consulting he has assisted over 30 clients in a variety of strategy formulation, process and systems implementation efforts. He has largely focused on operational excellence, supply chain and procurement. His clients include companies like Ashland Inc, BG&E, Brush Wellman, Capital One, Citizens Communications, Comensura, Dayton Power & Light, DTE Energy, Duke Energy, Duquesne Light, Eaton, El Paso Energy, First Energy, FPL Group, NiSource, Northrop Grumman, PSE&G, Santee Cooper, Unisys, UPS, Virginia Coal Company, Wells Fargo and Xcel Energy. He has authored several methodologies, training programs and articles on supply chain and operational excellence, and has been a frequent speaker at UPMG, AGA/EEI, IIE, APICS, CASA/SME and PeopleSoft conferences.