Purchasing Magazine’s latest cover story showcases the unique approaches and salesmanship procurement professionals need to employ to successfully convince internal customers — such as marketing and IT — of the benefit they can bring to negotiating and managing complex services spending. And the article couldn’t come at a better time.

With the national unemployment rate at 7.6% there is ample negotiation leverage for labor-intensive service categories — ranging from janitorial services and security guards to call centers and business consulting. In fact, as noted in a recent webinar, the Top 5 Categories to Source Now, whenever the unemployment rate exceeds 6%, companies can typically negotiate significant savings for categories where the labor component is a primary cost driver. And the high demand for jobs makes the recruiting effort easier.

The question that Purchasing Magazine attempts to answer is how to sell internal stakeholders on the idea that spend management can help deliver not just lower costs but greater value for complex services spending. Some of the techniques recommended in the article are now standard operating procedures. But it’s still a useful primer. For example, one tactic is to ensure that you speak the language of your internal customer. Purchasing: writes, “services buyers need to work with internal stakeholders on defining the value of a service and provider more than reducing costs.”

While the article is worth a read, I have taken the liberty to augment it with a few examples of successful services procurement approaches I’ve run into over the years:

• Give ‘em what they want: In a recent video interview with Procurement Leaders, British Telecom VP of Services Procurement Stephen Hayers shared the secrets of his team’s succes: “If we work with the businesses to give them what they want, then by the nature of it the compliance will go up. And what’s more important to me is not the compliance going up but the value to BT going up.” There are many examples of this principle in practice — such as using more disciplined marketing spend management to get more yield from existing marketing budgets, speed time-to-market, and improve brand integrity. (Notice I didn’t say reduce marketing costs.)
• Find a cause: Whenever possible, use corporate objectives to secure support for applying spend management to services categories. This was the tactic of the global procurement group at one large software developer. Wanting to expand its sourcing program to more complex spending, the team tapped into the CIO’s strategy to reduce rogue code, improve software quality, and reduce the use of external application development and testing (ADT) service providers. With the CIO’s support, the team conducted a detailed services specifications and alpha ratios before running a global reverse auction. The result: reduced ADT supply base from to five down from 1,700; sped ADT service engagement cycles by 40%; eliminated variability in development and testing quality; and reduced ADT costs by 20%.
• Don’t be afraid to use old (and proven) tricks: While the bulk of Purchasing’s article focused on how buyers need to apply different approaches for services procurement, one of the more compelling sections focused on how companies like Kaiser Permanente were applying proven direct material sourcing techniques — such as reverse auctions — to negotiate better deals on services spending. As noted here, leading sourcers like Sun Microsystems have been using dynamic bidding to get to true market value for complex services. Says Sun’s Strategic Services Manager: “Our philosophy is, if you can put someting on a spreadsheet and specify it, you can dynamically bid it. We initially received push back from some [stakeholders], but resistance is shrinking as they see the results we generate.”
• Pay for performance: Toyota and Tyco have shifted to a performance-based payment model with service providers. Toyota has begun employing performance-based contracting for its software and IT services spend, more closely linking payment to value delivered. Similarly, Tyco recently shifted from paying its outside legal council based on billable hours to a flat rate with a bonus for improving satisfaction and reducing litigation.

Complex services spending represents a large and predominantly untapped opportunity for savings at many companies. Purchasing’s conclusion is right: successfully getting services spend under management will require new approaches and “sales” tactics. Yet, don’t forget to use some tried and true techniques to yield improved sourcing and supplier performance.