How to manage services procurement

Services procurement is the process of buying and managing strategic outsourcing and consulting services through a statement of work (SOW). This differs from managing typical contingent workers, who are paid hourly via staffing suppliers. In contrast, SOW-based projects involve workers who are salaried by their employer and are paid an agreed fee for project completion, regardless of hours worked.

A real-life example

To understand how businesses use services procurement, imagine remodeling a bathroom. Like hiring a contractor for home renovation, the services procurement process involves interviewing multiple suppliers, evaluating their bids, and selecting the best one based on qualifications and cost. A formal statement of work (SOW) document outlines the project’s scope, milestones, deliverables, and timeline. This document usually specifies that penalties will apply if the contractor fails to meet the agreed terms.

Strategic and non-strategic services

Services procurement is typically associated with outsourcing services that are critical to the company’s strategic objectives, but it also applies to non-strategic service workers and projects, such as security services, facilities maintenance, or lawn care. Effective management of these services is essential to ensure that the work is properly performed, track who performs the work, and monitor compliance and security protocols.

Unlike procuring physical goods, which is typically centralized, services procurement is often decentralized within organizations and involves different supply chain dynamics. If not properly managed, this can result in unnecessary costs due to uncontrolled contracting, including rogue spend and “sweetheart” deals.

“Rogue” or “maverick” spend on service contracts occurs when managers buy services that have not been approved via the company’s normal budgeting process. These services are often not contracted via the company’s procurement organization or the centralized contingent workforce management program. If these contracts are sourced without a competitive bidding process, they may be seen as “sweetheart” deals, which may result in higher costs than necessary. They may even be unethical.

As services accelerate, staffing agencies and CWM programs step in

To control costs and curtail rogue spending, corporate contingent workforce management (CWM) teams are assuming ownership of SOW-based contracting. According to Staffing Industry Analysts (SIA), 63% of large staffing client firms now oversee some SOW spend, up from 42% in 2011, with 31% exploring SOW management within the next two years.

At the same time, staffing firms are also embracing SOW-based contracting as they look to provide higher-value, consultative solutions. SOW engagements offer several advantages for staffing firms, including better margins and the ability to attract higher-quality talent. SOW engagements can help client firms focus on their core operations while outsourcing non-core services, reducing costs and management overhead.

However, risks remain. For staffing firms, SOWs require strong expertise and careful management to avoid scope creep and ensure profitability. Rogue spend, where traditional staff augmentation is misclassified as an SOW, is another challenge, leading to potential risks like independent contractor misclassification and unexpected costs.

How to mitigate risks in services procurement

Effective services procurement management requires visibility, compliance, and risk mitigation. Organizations often struggle with decentralized processes that increase costs and compliance risks. A formalized, technology-supported approach ensures adherence to procurement policies, improves spend visibility, and mitigates risks like misclassified workers or security breaches.

Compliance and risk management

Compliance and risk management are critical benefits of a structured services procurement process. It ensures that external consultants adhere to company policies, prevents unauthorized contractor access after project completion, and avoids legal liabilities through proper supplier vetting and SOW approval. This structured approach protects the company from audits and fines and ensures regulatory adherence.

Importance of visibility into company spend

Visibility is paramount for effectively managing services procurement. Robust analytics provide insights into spend and help negotiate better rates and discounts. They also ensure that projects are managed within budget and scope, preventing overbilling and financial mismanagement.

Analytics: from data to insight

Analytics transform data into actionable insights, driving informed decision-making. Real-time analytics enable organizations to track spend, manage budgets, and ensure project milestones are met. This visibility aids in preventing overspending and optimizing procurement processes.

Increased operational efficiency and project quality

The right technology can enhance operational efficiency and project quality by facilitating competitive bidding and preventing “scope creep.” A structured, automated process reduces administrative burdens, ensures milestones are tracked, and efficiently validates invoices. This systematic approach helps avoid delays and minimize costs.

Maximizing cost savings

Deploying an automated services procurement management solution can yield significant cost savings by centralizing and automating the process. Research indicates potential ROI within a year and 5-10% cost reductions. Managing services procurement centrally via VMS helps track all spend categories, prevent inefficiencies, and secure better rates through competitive sourcing.

Value of effective services procurement management

Services procurement automation leads to numerous benefits including better compliance, more cost savings, enhanced quality, and greater operational efficiency. It ensures transparency, enforces company policies, and drives corporate value by leveraging the best talent and innovation. 

How can VMS technology improve services procurement?

A full-featured vendor management system (VMS) helps organizations manage risks and increase financial responsibility in procuring outsourced services. A VMS reduces administrative burdens and increases fiscal responsibility by providing consistent and automatic oversight of SOW-based projects.

A VMS can track, manage, and document worker classification, match invoices with deliverables and milestone approvals, and identify cost savings opportunities. Key benefits include: 

1. Financial responsibility and visibility

• Predictability and cost control: Reduces financial risks associated with time-and-materials-based contracts by providing better accrual reporting and visibility into project outcomes, not just hours worked. Ensures payments are only for agreed-upon deliverables.

• Audit-ready data: Enables finance departments to understand expenditure details, ensuring project budgets are met, additional budget needs are valid, and payments are for deliverables that meet acceptance criteria.

2. Risk mitigation

• Compliance and security: Captures auditable information on all resources under each service contract to ensure compliance with regulatory, auditing, and reporting requirements. Automates tracking and monitoring of resources from onboarding to offboarding.

• Preventing worker misclassification: Detecting and correcting worker misclassification issues efficiently and complying with various legal standards, such as the IRS 20-factor test (UD), IR35 (UK), and others, reduces the risk of penalties.

3. Process efficiency

• Automated processes: Streamline administrative tasks, reduce manual errors, and ensure accurate cost allocation. An intuitive user interface directs users to role-based dashboards that match their responsibilities and requirements.

• Integrated systems: Integrates with major enterprise systems like purchasing, accounts payable, and project management, reducing the need for time-consuming manual processes and costly errors.

4. Enhanced project management

• End-to-end tracking: Manages all aspects of service engagements, including independent contractors, tracking time, expenses, milestones, deliverables, and worker classification.

• Acceptance and billing: Link acceptance approvals to vendor invoices, ensuring deliverables are reviewed before payment. Consolidate invoice data and segment billing by business unit or cost center.

VMS platforms help organizations mitigate financial and compliance risks by providing complete visibility into all external workers and SOWs. They ensure proper management of outsourced services, leading to cost savings, improved process efficiency, and enhanced fiscal responsibility.  

What are the three phases of services procurement? 

A VMS with services procurement functionality allows organizations to gain visibility and control over all service contracts and contractors. This functionality should automate all three phases of the sourcing and management process: 

• Phase 1 – Competitive bidding 
• Phase 2 – SOW creation & negotiation
• Phase 3 – Project tracking & management 

To learn more about each phase of the services procurement process, read on. 

A detailed breakdown of service procurement’s three phases 

 Phase 1 – Competitive Bidding 

A full-featured VMS platform automates the competitive bidding process for SOW-based services, providing visibility, reducing costs, and ensuring compliance with regulations and company policies. It allows organizations to manage every stage of the bidding process efficiently, from requirements definition to bid evaluation and awarding contracts. 

VMS automation features should include: 

1. Competitive bidding management

• Automation and transparency: Automates the entire bidding process, ensuring visibility and maintaining an audit-ready compliance record.

• Multiple rounds of bidding: Supports multiple rounds to narrow down vendor choices, expand the vendor pool, and allow bid revisions for more savings.

• Vendor collaboration: Facilitates collaboration throughout all bidding phases, from solicitation to award.

2. RFx wizards

• Error prevention: Helps construct RFx documents, manage deadlines, and keep the process error-free and on schedule.
• Vendor communication: Ensures impartial communication, allowing vendors to submit questions anonymously and receive transparent feedback.

3. Vendor assessment and comparison

• Standardized assessments: Uses online questionnaires to ensure all vendors are assessed based on the same criteria.

• Side-by-side comparison: Provides a comprehensive view of all vendor responses and financials, simplifying the evaluation and shortlisting process.

4. Seamless transition from bidding to negotiation

• Automated SOW population: Automatically populates SOW templates with RFx data, ensuring continuity and consistency throughout the procurement lifecycle.

For more information about automating the competitive bidding process, click here. 

Phase 2 - Creating & negotiating SOWs 

A VMS should automate and streamline the creation and negotiation of SOWs, enabling buyers of complex professional and support services to collaborate with vendors efficiently. Properly designed, the system supports the entire process, from competitive bidding to project management, ensuring compliance, visibility, and control. 

Key features should include: 

1. Automated SOW creation & negotiation

• Template-based SOW creation: Users can create SOWs from templates that reflect your preferred corporate terms and conditions, favoring your company in negotiations, not your vendors.

• Real-time visibility: Provides insights into the SOW creation, negotiation, and approval processes through version control, flexible workflows, approval tracking, system alerts, and notifications.

• Ease of use: Prompts, menus, and auto-fill capabilities make it possible to create a compliant SOW in less than a minute.

2. Workflow and document management

• Dynamic approval capabilities: Ensures SOWs are reviewed by the appropriate stakeholders, minimizing process bottlenecks.

• Comprehensive document management: Facilitates easy creation, annotation, and storage of documents in a single digital repository, enhancing productivity and security.

3. Enhanced collaboration

• Real-time collaboration: Features version control, terms locking, and comments to streamline the negotiation process and provide a record for audit purposes.
• Version control: Allows red-lining in Microsoft Word, making Beeline the source of record and tracking all versions of the SOW, ensuring transparency and reducing disputes.

4. Seamless data flow

• Integrated processes: Smoothly transition data from competitive bidding to SOW creation and negotiation and from SOW approval to project management. This ensures real-time change order management and maintains visibility into all processes.

For more information about creating and negotiating SOWs, click here. 

Phase 3: SOW project tracking & management 

A VMS should offer complete project tracking and management, ensuring vendors meet milestones, deliverables match agreed acceptance criteria, and payments are accurate and properly allocated. This helps companies manage costs, improve process efficiency, and control vendor performance. 

Key features should include: 

1. End-to-end project management

• Visibility and control: Ensures milestones are met, and deliverables are up to standard.
• Cost allocation: Accurate allocation of costs to the correct business units and cost centers.
• Vendor performance: Provides analytics to measure vendor performance, negotiate better pricing, and ensure competitive rates.

2. Mitigate security and compliance risks

• Resource tracking: Captures auditable information on all resources, from onboarding to offboarding.
• Worker classification: Monitors worker classification to mitigate co-employment risks and misclassification.
• Automated compliance: Configures workflows to align with compliance policies, business processes, and regulatory standards.

3. Project tracking

• Comprehensive monitoring: Manages all service engagements, tracks time and deliverables, and handles various contract types, including fixed-price, time and materials, and unit-based contracts.
• Role-based dashboards: Intuitive user interface with dashboards tailored to user roles and responsibilities.

4. Acceptance, billing, and payment processing

• Linked approvals: Ensures deliverables are reviewed and acceptance criteria are met before invoice submission.
• Invoice management: Consolidates invoice data and segments billing by company, business unit, country, or cost center.
• Automatic segmentation: Generates multiple invoice files for accurate cost allocation.

5. Integration with enterprise systems

• Seamless integration: Integrates with major enterprise systems like purchasing, accounts payable, project management, and security systems to reduce manual processes and errors.

6. Measure and analyze vendor performance

• Performance metrics: Uses project and milestone surveys to measure and track program quality.
• Actionable reporting: Drives program improvement goals through detailed reporting.

For more information about SOW project tracking and management, click here. 

Build a winning business case for services procurement 

Once you understand the value a VMS can provide in managing the risks and providing better control over service contracts, the next step is to build a business case for implementing an automated services procurement solution. Here’s how: 

Components of a services procurement business case 

1. Business challenges and opportunities 
   This section should describe the objectives and problems the services procurement solution will address. It is important to align these objectives with broader corporate initiatives, such as cost savings, risk mitigation, or organizational agility.

2. Benefits assessment 
   The business case should compare the investment's benefits against maintaining the status quo or other projects. Benefits should be quantified financially, including cost reductions, risk mitigation, quality improvements, and other tangible and intangible advantages.

3. Risk evaluation
   This section should summarize the critical business risks associated with implementing the solution, including their likelihood and impact. It should also compare the deployment risks versus those of not deploying the solution.

4. Resource requirements and costs
   The business case should detail the direct and indirect implementation costs, including VMS technology, MSP services, internal staff costs, and change management expenses. It should also highlight the potential for cost savings through proper contingent labor classification.

5. Technical solutions
   The technical solution, including process mapping, configuration, and integration, should be described. The VMS provider typically supplies this information.

6. Readiness Assessment 
   This process determines how aligned the organization is to implement an automated services procurement solution. It involves reviewing practices, organizational hierarchy, and domain data required for approval.

7. Timeline 
   The business case should outline the proposed implementation timeline, including significant milestones and critical path events. Consideration of scope and phasing is crucial for successful deployment.

8. Project organization and operational impact 
   This section describes how the project will be managed, including roles and responsibilities, project tolerances, standards, review points, and stakeholder communication. It should also consider the impact on business continuity and include plans for managing operational change.

You don’t have to do it alone 

Building a business case for services procurement is the essential first step toward managing an extended workforce effectively. With over 20 years of experience delivering automated services procurement solutions, Beeline can help you build a business case that illustrates how a VMS can help your organization achieve visibility, control costs, mitigate risk, and leverage the full potential of this vital and growing part of your extended workforce.  

Visit beeline.com for more information about how a vendor management system (VMS) can automate and enhance the way you manage services procurement. 

To schedule a VMS demonstration,  contact Beeline today.