Procurement Service Providers - Better Go Get Your Armor

The market for procurement service providers (PSPs), a sector that includes everything from strategic sourcing consulting to GPO contracts to full blown procurement outsourcing, is shaping up to be quite a battlefield over the next 12-18 months. From personal observations of recent trends I predict there will be spectacular confrontations between the industry's major players as they seek to capture and protect market share, particularly in the eagerly desired upper mid-market segment of companies between $500M and $5B annual sales. And it won’t just be the E-Sourcing Suite Giants and Consulting Firm Goliaths fighting for the business of a customer base considerably more PSP-educated than in the heady pre-B2B bubble days. There will be a myriad of PSP boutiques and GPOs joined in the battle, many of these smaller and more nimble players able to offer flexible and customized solutions at significantly lower cost. To make matters particularly feisty, many of these PSP boutiques will be led onto the field of play by the very same consultants who helped to shape and form the procurement consulting practices of their larger opponents in the late nineties and early 2000’s.

If you are the CFO or CPO of a mid-market company today, you stand to benefit handsomely from the upcoming smackdown in the PSP market. You will be able to categorically demand the highest levels of tangible and lasting value from the various players, large and small, who will parade their wares in front of you over the coming year. You will be able to insist that this value be delivered at the lowest possible cost and with the lowest possible operational risk. Specifically, you will be able to stridently and confidently voice the following demands to the massed ranks of Davids and Goliaths standing in front of you ready to fight for your PSP budget dollars-

DEMAND ONE – I want big cost savings that I can measure

You should demand at least 5-12% savings on direct materials and 15-25% or more on indirect. You should demand that these savings be measurable and budget-impacting based on either lower prices or reduced usage through demand management. Look for PSPs who will guarantee cost savings or offer benefits-funded fee arrangements. Avoid PSPs who mention "process" or "efficiency" savings or who ask to be paid like it’s 1999.

DEMAND TWO – I want a fast ramp-up of the cost savings during the first year

You should demand that at least 80% of annualized cost savings be realizable in the first year. You should ask for specifics about how they will bring forward cost savings and avoid multi-month sourcing projects that take a year or more to throw dollars to the bottom line. Avoid PSPs whose proposals feature pages of “sourcing wave strategies” and “commodity work teams”. Look for PSPs who offer flexible rapid sourcing approaches, incumbent renegotiations and pre-negotiated contracts.

DEMAND THREE – I want suppliers that meet or exceed the service levels of incumbents so that I face minimum resistance from internal department stakeholders

You should demand that whatever techniques are used to create savings, internal departments receive equal or better levels of quality and service. You should demand that any new suppliers selected will sign up for service level guarantees in the areas of quality, delivery lead times, customer service and other key category-specific metrics. Avoid PSPs who talk only about “mandating compliance”. Look for PSPs who talk about how they will work in an integrated fashion with internal stakeholders during the sourcing process.

DEMAND FOUR – In exchange for me providing you with a multi-year spend commitment, I would like some of my savings paid up front in the form of a prebate or signing bonus

Depending upon the categories in scope, you should demand that providers work with suppliers to provide upfront savings in the form of cash prebates on contract signing. This technique, used mainly with pre-negotiated contracts, serves as a compliance enabling tool since such arrangements require the customer to pay back some or all of the prebate if a pre-set spend dollar commitment is not met. Avoid PSPs who won’t consider this. Look for PSPs who will.

DEMAND FIVE – I’d like to pay the minimum possible fees for your services. In fact, where practical, I would like to pay nothing at all

Particularly for indirect categories, paying little or nothing for a PSP’s services is not at all far-fetched. Whether through benefits funded approaches or pre-negotiated contracts you should press on providers’ willingness to dig deep and dramatically reduce your investment requirements. Avoid PSPs who persist with ridiculous seven-figure spend management outsourcing pitches. Look for PSPs who offer procurement savings programs where their revenue models are either supplier-funded (e.g. pre-negotiated contracts) or benefits funded (e.g. sourcing fees based upon savings from an RFP).

The above demands are fair, reasonable and – more importantly – will result in your organization being able to maximize the return on its investment in PSP services. Don’t listen to the whines of those who long for a return to the days of multi-million dollar cost structure-feeding “house accounts”. Listen to your business. Listen to your internal stakeholders. Then seek out those PSPs who fight to win the battles in their market place but who do so with a clear focus on what it will take to be successful – putting their customers’ demands above their own.