The UK services sector has virtually doubled in size in the last 25 years and now accounts for over 75% of GDP. When manufacturing dominated the UK economy, and cost of goods sold (COGS) represented circa 50% of revenues, negotiating best price/quality on bought in goods became a key success factor and consequently, most manufacturing companies had a buyer/procurement department. So unsurprisingly, given that circa 30%-40% of a service sector company’s direct costs are people related, the competitive advantage driven by sourcing/procurement has been diminished and the profession is often struggling for its voice to be heard in the changing SME economy.
The key question, therefore is:
Are services companies missing sustainable profit improvement opportunities by failing to apply the same disciplines once ubiquitous in manufacturing to their non-headcount spend (often called “indirect purchasing”)?
In my extensive experience, the answer is a definitive yes. If you talk to most SMEs, non-headcount related purchasing is left to the budget holder/finance with little if any involvement from any type of procurement professional. Some may say, “why is this a problem, the budget holder is an expert in their field so there is no need for procurement to get involved”. To put this myth to rest, across hundreds of procurement led savings projects on indirect spend I have seen, savings range from 6% to 60% of like-for-like baseline spend with an average saving of 10%.
Putting this in context:
For a services company with a turnover of £10m, this can equate to £200k-£400k of net profit improvement with no increase in sales; as a good friend of mine puts it, this is “the gift that keeps on giving”.
So, how do you deliver these kinds of savings whilst maintaining a number of long-standing supplier relationships, improving quality and ensuring service delivery isn’t impacted during the process?
The first thing to understand is where to look, typically, the following categories are good candidates for identifying savings:
- Technology (laptops, tablets, mobiles, etc.)
- Employee Benefits
- Marketing and any associated media spend
- Professional Services
- The requirement has not been formally tested in the market for over 3 years
- There is no defined specification
- The buyer uses the supplier to ‘help out in emergencies’ on a regular basis
- There is no contract in place
- People purchase on a first quote basis because ‘that’s what they have always charged’
Then, you need to understand which lever you are going to pull to deliver the savings which can broadly be described as:
- Stay with the same supplier but negotiate a better deal
- Go to market and tender to several suppliers and identify the best-fit provider and commercial terms
- Consolidate spend across fragmented suppliers resulting in a single source supplier with more spend at better prices
- Reduce demand (buy less), e.g. number of software user licenses based on utilisation
- Re-specify/transform the category (bundle several things together and use technology to change the way the outcome is delivered)
There is a lot more to this than can be covered here, but, my key message is:
Sustainable profit improvement using procurement specialists can add material value within services companies if you focus on up-front data analysis, rigor and the application of experience.
By Mike Lander, director and co-founder of Ensoul and a business consultant
I would like to thank Jeremy Smith, director, 4cassociates for his peer review support in writing this article.