Here’s what top procurement leaders are concerned about
June 28, 2018
In May of 2018, The Select Group hosted a services procurement round table attended by executives from over a dozen major companies in the Bay Area. The purpose of the round table was to foster discussion around issues procurement leaders face in today’s business environment. The past few years have seen a number of transitions in services procurement, including co-employment issues, managed services and growth, increase in freelancer solutions, compliance, vendor rationalization, and a growing interest in assessing the value of managed service provider (MSP) and vendor management system (VMS) solutions. This white paper will summarize the discussion points from the round table.
Services Procurement – What’s Top of Mind
2018 has been a year seeing continued shifts towards new service models across many industries. The normalization of cloud (XaaS) offers, cyber security, IOT and big data, near-shoring and other strategies, presents new and unique challenges to services procurement leaders. At the same time, these leaders are wielding greater influence than ever in their businesses, driving initiatives around compliance, spending and sourcing strategies, and collaboration between procurement and corporate lines of business. This is likely to continue into 2019 and beyond.
The top focus areas for services procurement include:
- managed services
- vendor rationalization
- VMS and procurement technology
The Affordable Care Act (ACA) drove renewed interest in the classification of workers relative to their true employer. While this was surely a major shift in worker classification, it was not the only driver. Indeed, worker classification was probably a significant, but often ignored, business issue for a number of years. Regardless of the impetus, many companies moved to tenure limits for staffing services, requiring temporary staff to off-board from companies’ contingent worker rolls after a predetermined period of time, and wait through a cooling off period before they could be considered for another position at the same company. Companies set their own tenure limit, usually tied to their risk profile, and typically range from 12 months to 24 months. Cooling off periods were similarly set, ranging from three months to a year.
The tenure limits cleared many issues with co-employment but introduced other challenges to companies, the least of which is business disruption. With contingent workers in a state of flux, business units now faced continuity challenges, talent drain, and team culture issues as a result of losing capable, trusted, long-term, skilled contingent resources from close-knit teams.
Procurement and HR teams can create strong partnerships by helping understand a company’s contingent workforce strategy. For example, does a company want contingent workers that have been on-board for many years? While many independent contractors are perfectly satisfied being long-term or perpetual contract workers, this can create internal issues for HR related to company perks, sensitive communication, workforce planning, and management behaviors. Where there is a need to separate benefits or access between permanent and contingent resources, procurement and HR divisions can leverage technology to ensure compliance.
This is not to suggest there won’t be conflicts – HR is traditionally interested in securing the best talent, retention, and diversity, while procurement is focused on price controls and vendor compliance. While these can be competing goals, an evolved organization can find ways to marry the two areas of focus into an effective partnership.
In response to the tenure issue, many companies began sourcing services through managed service agreements. A managed service is defined as when an information technology (IT) services provider is responsible for providing a defined set of services to its clients. Benefits of a managed service include shared risk between provider and client, service level agreement (SLA)-based delivery, consistent and predictable pricing, measurable outcomes, and continuous improvement opportunities. This model also clearly leaves management of workers in the hands of service vendors, with the goal of eliminating any tenure limit concerns.
There is a caution here, though. Simply flipping contingent workers from staff augmentation to a managed service does not guarantee the tenure limit is free from employee labor challenges in court. It’s a necessary first step, but companies also need to examine their employee benefits programs, on-campus perks, and meeting and team event participation. Companies that fail to draw bold lines between their engagement with regular employees and contingent workers also fail to protect themselves from possible co-employment claims. Managers should not perform performance evaluations of contingent workers. Agreements for services should not be based on an individual’s hourly rate, and should address service level agreements and overall service objectives.
In traditional staffing, companies with an eye toward compliance will generally look to a managed service provider (MSP) to ensure key requirements are met when engaging with service partners. In the staffing world, MSPs manage the contingent workforce, through a vendor management system (VMS) platform. This can include independent contractor/1099 verification, vendor enrollment, and preferred provider program eligibility, volume discount agreements, vendor insurance requirements, and on-boarding and off-boarding.
During the initial procurement cycle, after service activation, these same MSPs can assist companies in monitoring contract compliance: tracking and reporting on SLAs, contract deliverables, milestones, and implementing any relevant service penalties or incentives based on partner performance.
Increasingly, companies are asking their MSPs to also manage statement of work (SOW) engagements – contract agreements usually leveraged to award managed services to providers. This introduces new challenges due to the unique nature of the services agreed to, the more complex tracking of SLAs and deliverables, the enforcement of penalties or awarding of incentives, and more.
A 2014 survey of contingent workforce buyers by Staffing Industry Analysts reveals that only 54% of buyers report managing SOW as part of their contingent workforce program. Companies often rely on prior engagements or relationships in selecting SOW vendors. This can limit the vendor options and may miss an opportunity to select the most qualified vendor for a project, and hinder the potential to realize price benefits among competing vendors.
Companies should explore a more robust MSP strategy that encompasses staff augmentation and managed services alike. A robust MSP can help companies understand the value received from managed services, track SLAs and deliverables, provide detailed reporting about scope, review schedule and cost, create vendor scorecards, and manage exceptions or scope changes within a managed service when they occur. Procurement teams play a key role in these opportunities through integration of SOW, PO, approvals and exception activities. From the vendor perspective, an integrated VMS can speed time to payment for services rendered, as the MSP becomes the direct “payor” rather than the end client.
Ultimately, compliance work is expensive. Be sure to assess and understand what risk is being mitigated, and at what cost. Procurement organizations often have a “brand,” internally and externally, and their goal should be to add value to the company as an advocate for consistency, cost savings, and vendor partnerships.
When a VMS option is deemed too expensive, some companies are moving toward an “internal VMS” model. Monies that would have been paid to the MSP for vendor management services can be redirected to internal staff, who have more direct knowledge of the business requirements, project dynamics, etc. MSPs should be measured for the value they provide, and when that value is not clear or easily measured, it may be time to consider internal alternatives.
There are some challenges in moving to an internal VMS approach:
- permanent headcount budget is required to run the program
- generally, companies still see value from a MSP (on boarding, background checks, hiring process)
- bench marking against other MSP clients
- opportunity to leverage the MSP against the pressures of the business
A number of companies are also settling on a “hybrid” approach – leveraging a VMS or MSP but also making internal investments to ensure the primary objectives of the business units are being met.
Advancements in Technology
There are other forces in play here. A rising emergence of freelance labor platforms is piquing the interest of some procurement officials. While there are many issues to resolve, freeing a company from many of the low-level tasks of talent identification, verification of skills or certifications, and a growing variability in project or service duration raises the relevance of freelance providers. Imagine a world where all work was sent out to bid and independent contractors control their own bill rates and value articulation.
Artificial intelligence platforms like IBM’s Watson can help procurement officials scan SOWs, catch any “fake SOWs,” and generally increase efficiencies in high volume procurement operations by an order of magnitude.
Companies leveraging an Agile approach for more than just software development bring a unique challenge when measuring vendor performance, SLAs, quality, and work product. Potentially, less discrete deliverables can cloud the water when looking at contract performance. Companies should consider the impact of technology and process when looking at their procurement strategy.
Innovation within procurement activities is important. Business needs compliance, but compliance can’t choke the business.
Procurement teams will always struggle with how to deliver cost-savings while also evolving toward value-based measurements. Thankfully, technology, thought leadership, and collaboration is abundant in most procurement organizations and the future is bright!
To learn more about The Select Group’s Managed Services portfolio, click here.
This post is from our CXO Blog series, written by Jeff Zirker, our Chief Experience Officer (CXO). See the rest of his collection here.
Jeff Zirker started with TSG in 2015 after more than 22 years with a leading U.S. technology company. His passion for people has led to the implementation of new processes and programs across the company designed to enhance customer experience. No stranger to adventure, Jeff once spent two weeks on an uninhabited Hawaiian island.