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Extracting Value From Professional Services


In a two-speed economy

- Ahmed Nada, Christian de la Rica Gustafsson & Trevor Clancy

Portland
Introduction
Industries running in the fast lane of the
Australia is experiencing what has been
economy are operating on the higher gears
described as a “once in a generation”
of growth and profitability. Others are
economic boom. Terms of trade are at
struggling to keep the engine from stalling,
record highs, inflation within target range
spluttering along in the slow lane, trying to
and unemployment is consistently low.
maintain profit and remain viable.
The modernisation of China is perhaps
the single most important driver of these This situation has significant implications
“This situation
conditions. However, not everyone seems for the procurement category manager, if has significant
to be making hay while China’s economic their company happens to be in the slow
implications for the
sun shines. Mining companies continue lane. They have an important role to play
to make incredibly high profits at levels in extracting value from, and reducing, the procurement category
unmatched in Australian corporate company’s cost base. Particular attention is
manager,
history. Financial Services companies important to categories that are normally
are undergoing deep structural changes ignored in good times. This paper will focus if their company
coupled with job cuts and unconventional on the value levers available in a two speed happens to be in the
out-of-RB A-step interest rate movements economy for extracting value from one of
to protect margins. Retail is also suffering; the most complex, and often ignored, of
slow lane”
an industry major recently reported a 20% indirect categories: Professional Services.
drop in half-year profit and forecasting a
40% drop on the full-year number.

This marked contrast in economic


performance by different industries gives
rise to the term “two-speed economy”.

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Professional Services Increased Costs increases substantially, requiring firms
to allocate more resources to that sector
Definition High Supplier Utilisation
(through hiring or redeployment). This
For the purposes of this paper, the drives up the opportunity cost of those
Perhaps the most important driver of
Professional Services category covers all resources, leading to higher charge
Professional Services fee rates is resource
advisory services with a defined outcome out rates and adds to cost pressures of
utilisation. Professional Services firms
or deliverable. Examples of services under companies in the slow lane.
essentially sell their resource’s (read:
this category are Management Consulting
staff ) time. Billable Time is created
or Legal services. Suppliers of these
when a resource is working on a client
services are typically firms employing Increased Financial Discipline
engagement for which the client pays
highly skilled and specialised individuals A natural reaction for companies
the firm. The rest of that resource’s time,
providing advice to business customers. affected by the slow economy is
where a client is not being billed (including
In providing these services individuals to conserve money and reduce
annual leave and other entitlements but
leverage the intellectual property, tools “discretionary spend”. Professional
excluding weekends), is often crudely
and processes of the supplying firm. Services is often considered just
referred to as “Bench Time”. Utilisation is the
that. Companies tend to reduce the
ratio of (Billable Time)x 100/(Billable Time
amount of legal or consulting advice
Challenges with managing + Bench Time), expressed as a percentage.
ordered from third-party suppliers.
Professional Services in a All “Time” units are in days. The higher
They put off projects or manage
the utilisation rate, the more profit the
Two-Speed Economy them in-house, or both. Supplier
professional services firm is earning for that
In the slow lane of a two-speed firms respond to the drop in demand
resource. It therefore stands to reason that
economy Professional Services by redeploying resources to other
the higher a resource’s utilisation, the more geographies (locally or globally) or
market dynamics create two key
valuable their time is to the firm - creating other sectors of the economy, creating
challenges for the category manager,
a higher opportunity cost for that resource a shortage of advisory resources to
namely increased costs and reduced
which the firm can pass on to its clients in the slow-moving industry. This in
compliance;
the form of a higher daily rate. turn drives up the opportunity cost
In a two-speed economy many Professional of those limited resources and, in
Services firms will tend to have high turn, their fee rates. Such a situation
utilisation rates because demand from
compounds the Professional Services
cost pressures of companies in the
companies in the fast lane of the economy
slow lane.
External Document © 2014 Infosys Limited
Reduced Compliance with new stakeholders who don’t know managed. Without this understanding,
Organisational Restructuring (or don’t care) about the procurement actions are likely to either under deliver on
process, supplier invoices generated existing potential or be too ambitious as
Organisational restructuring is a common to risk implementation paralysis (so much
outside of the approved system (with no
reaction by companies grappling with to do that nothing actually gets done).
proper approvals) and compromised spend
a challenging economic environment. Professional Services category maturity is
reports from AP data which has all-and-
Business Unit consolidation, removal of a function of the category management
sundry items included under Professional
management layers and reorganisation of effort that an organisation invests and the
Services. Ultimately category management
staff positions are typical outcomes of this degree of organisational compliance to
and, in turn, benefits are compromised.
process. This situation creates a significant the processes and systems created by that
This leads to upward pressure on the
issue for the procurement manager; effort. From a procurement perspective
company’s cost base.
Compliance to preferred suppliers and a Professional Services category can
process takes a dive. Managers who generally be classified as:
followed the proper procurement process Addressing the challenges
for engaging a professional services firm Step 1: Understand the category’s
l Unmanaged: Spend is not centrally
have been replaced (indeed it took the controlled or influenced by policy,
position on the Professional Services
process or any significant procurement
category manager a lot of time to get Category Maturity Curve input
these managers to comply in the first
In devising a strategy to extract value l Partially Managed: Some controls exist
place). Personal Assistants who knew
from Professional Services the category to manage spend
their way around the online system to
manager must first evaluate where they Actively Managed: Full category
set up a Purchase Order are no longer l
are on the category maturity curve. The management disciplines are actively
there. Accounts staff who understood
the correct classification of Professional
maturity curve represents the “baseline applied to influence spend including
situation” which effectively defines the supply, demand and supplier
Services spend (instead of treating that
organisation’s readiness for change in the performance management
ledger code like a miscellaneous bucket)
way the Professional Services category is
have gone. The category manager is faced

Key category characteristics along the maturity curve are described in diagram 1.
Supplier panels in place:
MSAs and rate cards with all
key suppliers
MSAs with a few suppliers
Regular supplier reporting
and periodic spend/benefits
reporting to stakeholders
Some supplier rate cards
in place
Adhoc processes for Active, regular supplier
engaging suppliers performance management
ORGANISATIONAL COMPLIANCE

Single known procurement


process to engage suppliers
enforced by policy Procurement review &
No supplier MSAs
benchmark all SOWs

Category Plan in place


No agreed supplied rate Regular SOW competitive
cards bidding
Standard SOW template
Procurement input is a enforced
rubber stamp (limited Procurement provides advice
value-add) to stakeholders on SOW
components, sourcing
strategy or supplier
Limited reporting or spend selection
visibility

Standard SOW template Technology-enabled SOW


not enforced management and spend
(Supplier paper used) reporting tools

UNMANAGED PARTIALLY MANAGED ACTIVELY MANAGED

CATEGORY MANAGEMENT
Diagram 1: Professional Services Category Maturity Curve
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Step 2: Devise appropriate benefits defined procurement process and high practice, will also not be logical. Hiring a
strategies compliance – get it right onshore and new category manager for Professional
then off-shore Services will probably run counter to the
As discussed in the previous section, two of
organisation’s headcount management
the common challenges for procurement
strategy.
managers involved in Professional Services, l Tight cost management and a vibrant
are to: supply market imposed by the two-
a) Reduce, or minimise increases to, speed economy: This restricts the Like most organisational change, travelling
Professional Services charge out rates; strategic options available. For instance, up the maturity curve is a journey that
and direct negotiations with suppliers takes place over time. The earlier the
to reduce rates will probably not be category manager commences this
b) Increase organisational compliance to
effective (if not counterproductive) journey, the more high-value benefits
preferred suppliers and processes
since suppliers yield more negotiating strategies they will have available when a
These objectives need to be addressed power. Investing in eSourcing and two-speed economy occurs. Appropriate
bearing in mind: Statement Of Work benefits strategies based on the category’s
position on the maturity curve are
l Position on the maturity curve: Some l (SOW) management technology to
described in diagram 2.
strategies may not be useful depending increase compliance is probably not
on the category’s position on the an option since the CFO will have
maturity curve. For instance, there is little appetite to release the funds or
little point considering off-shoring organisational resources required.
category management tasks if currently Investing in new interactive online
the company doesn’t have a well reporting dashboards, while best

Aggregated spend with each Off-shore some category


supplier (agree volume management tasks to lower
discounts) cost countries

Refresh panel too add lower


Established Supplier Panel
costs supplier or extend
(capped, uniform rates)
incumbents’ rates/terms

Outsource category
Increase invoice-SOW audit
management to managed
(cross-checking)
service provider (Access to
Assign category proven IP + increased
management accountability savings = higher ROI = net Standardise specifications for
to existing staff organisational benefit) repetitive purchases (e.g.
ORGANISATIONAL COMPLIANCE

standard legal fees per lease


Eliminate nice-to-have type matter)
Develop single SOW deliverables from SOWs
Procurement Process (scope management)
Increase spend visibility
through reporting
Increased use of cheaper
Diagnostic to understand contingent labour in place of
current state & opportunities consulting/legal resources

Senior executive sponsorship & communication of procurement process and


demand reduction targets

Tighten consulting expense approval policy (delay/eliminate expenditure)

Increase competitive bidding of SOWs

Communication of SOW Procurement Process to stakeholders and suppliers

UNMANAGED PARTIALLY MANAGED ACTIVELY MANAGED

CATEGORY MANAGEMENT

Strategies to reduce, or minimise increases to Professional Services costs

Strategies to increase organisational compliance

Diagram 2: Professional Services benefits strategies in the slow lane of a two-speed economy
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Case Study early in the process. This was important By the time slow-lane conditions affected
to build stakeholder support and the industry, the organisation’s culture,
One of Australia’s largest financial
compliance, as well as justify investment stakeholders and suppliers were able to
institutions extracted 11% savings while in
to move further up the curve. A diagnostic accept more advanced benefits strategies.
the slow lane of the economy (see diagram
revealed significant opportunity to extract Competitive bidding of SOWs doubled,
3). Key to success was the category’s
benefits through changes to supply leading to project-level savings. Lower-
high maturity at the time the company
experienced slow-lane market conditions. model, processes and category demand cost suppliers were easier to add to
It’s like having invested in training a management. Outsourcing category the well-oiled and functioning panel
racehorse (building up its stamina and management to a Managed Services process. Enforcement of tighter approval
muscles) which enabled it to win the race Provider enabled access to professional processes was facilitated. Because of
despite being faced with rain and a muddy experience, capability and intellectual strong compliance and highly effective
track on race day. The category’s maturity property taking the category further and mature processes, the organisation
afforded the organisation high-value up the maturity curve. A focus on was able to consider and implement
benefits strategies that would not have building stakeholder and supplier off-shoring some of the basic category
been available if the category were at the compliance helped engrain the management functions (saving costs). This
lower end of the maturity curve. category’s processes and policy in the will give the category manager more time
organisation’s culture. to focus on strategic category tasks, to
While moving up the maturity curve took
time, significant benefits were achieved move further up the maturity curve.

YEAR 1 YEAR 2 YEAR 3 YEAR 4

Refreshed panel to add lower


cost suppliers

Setup panel (aggregated


spend): MSAs with Locked in and extended
competitive rates and preferential terms with key
discounts suppliers
ORGANISATIONAL COMPLIANCE

Immediate Outsourced Category


benefits Management (critical IP Increased competitive
10-20% e.g. spend database) bidding

Implemented compliance Increased SOW /Invoice


improvement initiatives auditing

Undertook diagnostic to
understand current state & Tightened consulting
opportunities approval process

Facilitated senior executive


Considered off shoring some
sponsorship &
category management tasks
communication

Implemented single SOW 11% Savings


procurement process Two-Speed Economy
(including invoice (lower gear)
authorisation)

UNMANAGED PARTIALLY MANAGED ACTIVELY MANAGED

CATEGORY MANAGEMENT

Diagram 3: Professional Services Category Maturity at a major Australian financial institution

External Document © 2014 Infosys Limited


Conclusion
The Professional Services category manager has an important role to play in reducing the company’s cost base amidst the challenges
presented by a two-speed economy. He must appreciate the upward cost pressures imposed by the supply market as well as the
organisational readiness to change the way Professional Services is managed.

The maturity curve provides a guide to understanding the current category situation in order to assess organisational readiness for change.
Armed with this understanding, strategies can be devised that enable the company to extract value from its Professional Services spend,
ultimately reducing its cost base.

Increasing category maturity is more of a marathon than a sprint. Long term category strategies and goals need to be articulated and
implemented. Ideally this will happen in favourable market situations, when it is easier to build stakeholder support and compliance. This
puts the company in a stronger position to extract benefits from Professional Services spend if it ever finds itself in the slow lane of a two-
speed economy.

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About the Authors
Ahmed Nada
Ahmed Nada is the Practice Leader, Professional Services at Portland Group. His team established an industry-leading and
awarded process for managing professional services. Ahmed works with clients to maximise benefits and reduce risk from
typically under-managed professional services categories.

Christian De La Rica Gustafsson


Christian De La Rica Gustafsson is an Engagement Manager at Portland Group. He has assisted leading Australian
organisations extract value from their Professional Services spend.

Trevor Clancy
Trevor Clancy is Director Service Delivery at Portland Group. Trevor has led diagnostic and sourcing engagements with major
Australian companies in the Professional Services Category.

About Infosys Portland


Infosys Portland is a subsidiary of Infosys BPO Ltd., a part of Infosys Ltd. Our mission is to make our clients successful by increasing their profitability through
procurement and supply chain improvements. We are unique in providing services to improve efficiency and effectiveness across our clients’ complete

Portland
procurement and supply chain functions, ranging from innovative, high-end strategy through to effective, low-cost operations and transactional processing.
The resulting transformational benefits for clients include lower costs, reduced risk and improved service from client suppliers.

For more information, contact info@infosysportland.com www.infosysportland.com


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