Author: Kimberly Smokey, Former SVP & Director of Indirect Procurement and Corporate Services with Wachovia/Wells Fargo (see full bio)
Indirect Services Successfully Managed with a
Rate Comparison Tool
Indirect Services, whether centralized, decentralized or a hybrid model, are a complex group of categories (commodities) to manage as there is little continuity between the managed categories. Each Indirect Service category is most often managed distinctly based upon the product/service offering and primary business unit goals. For instance, the strategies and goals for Travel Services would be uniquely different than those of Marketing.
Additionally, each commodity category often has multiple suppliers per category, each with different rates, service levels and performance history. The complexity increases exponentially if there are variables to the services, such as geography, product size, service time frames, etc. Communicating to business users which supplier is best for each situation as they are needed is not only difficult, it is impossible.
A rate comparison tool that identifies the least expensive supplier, that is able to meet the service level expectation, without displaying a confusing series of data points to the user, would be an invaluable tool and provide a mechanism by which the user could generate significant cost savings for the Company. It would also influence compliance without mandates and enforcement policies. A rate comparison tool that can be tailored to the unique business rules and processes will also enable the Company to analyze the purchase of products/ services by consumer/user for trend reporting that will positively influence future demand management.
Industry benchmarking estimates show that the hard dollar savings associated with a “rate shopping tool”, run between 10% and 15% of the existing spend for the rate shopped service or product category. Further cost savings will result from competitively displaying any internal service options that can be utilized instead of a third-party supplier’s product/service.
The tool should be a user-friendly application that enables a Company to provide point-of-sale information that will assist with the identification of policy requirements, as well as, provide simplified data enabling users to make the most cost effective decisions at the time of purchase. The presentation of this data will create “visual guilt”.
The tool would be designed to facilitate both enterprise-wide, and line of business specific business rules; such as, spending caps and allowable service levels. It would present employees with a list of preferred, contracted suppliers while ensuring that complex pricing and service levels are easily translated into user friendly displays. The tool would also remain current with updated contracts and changing policies and business processes. Additionally, a Rate Comparison Tool would serve to mitigate risk through enhanced governance controls.
How many times have you selected the lowest fare airline ticket when the multitude of options and fares were presented to you in a logical format? Doesn’t it make sense that employees will often do the same when purchasing goods/services for the Company?
A rate comparison tool is one of the best mechanisms available to a sourcing organization to assist with managing the complex set of options associated with Indirect Services categories. It also provides a mechanism to optimize process efficiencies, while generating significant cost savings. All without requiring mandates or creating and enforcing auditable policies.
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Tags: indirect procurement services, indirect services, indirect spend management tools, spend management rate comparison tools,
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Your comments are well articulated and we have seen some impressive behavorial shifts because of “visual guilt” or as I prefer to think about it, better decisions made with better information. Lanyon recently launched a solution we call “Rate Parity” that identifies (in advance) the lowest unrestricted hotel rates available at up to 150 Online Travel Sites and Supplier Direct Sites. We have found that approximately 30% of the time, we are able to find lower rates than “negotiated” corporate rates. With this evidence, buyers are successfully working with their suppliers to adjust pricing to truly reflect the leverage they expect to command. We’ve come along way on the airline side but there is enormous untapped opportunity in truly managing hotel spend.
Comment by Mike B — June 22, 2010 @ 12:26 pm
Mike
It is interesting that you would immediately think of a travel services rate comparison tool in response to my article. That is, of course, the most common application of rate comparison and where the concept was somewhat perfected. However, in travel specifically, I believe purchasing a third party tool is beneficial only when a company does not utilize a travel management company (TMC). If a TMC is being utilized, rate comparison should be part of the booking process, from which utilization reporting can be obtained. At the end of the day, more benefit comes from utilization reporting and creating a demand management analysis to further address both maverick spend and uninformed decisioning.
Additionally, when rate comparison is being used for travel, it is often less about looking at public pricing and more about negotiated contract rates. Again if a company is not utilizing a TMC, nor do they have a structured strategic sourcing process in place for travel, using a tool for public pricing may be beneficial. But it makes me wonder if that is the case, why couldn’t I use Travelocity or Expedia, both have created a “corporate” application that provides more than the general public version.
In my article, I was actually talking about a concept that is gaining momentum in advanced procurement organizations where rate comparison is being used for numerous indirect service commodities, such as Express Mail, Legal Services, Print Services, Office Supplies, Fleet, Marketing, HR, Logistics, etc. In most companies, there are multiple suppliers, rates and service structures for every indirect service category, creating a very complex decision matrix. A rate comparison for these functions, which are far less explored and far more complex, will have immediate and significant affect on cost savings for an organization. Knowledge is power and people most generally want to do the right thing – they just don’t always have the information necessary to do it.
After a fairly exhaustive search of tools able to accomplish a rate comparison function for the majority of Indirect Services, I have only seen 3 tools in the market able to handle the task. Of those tools, only 1 originated from the Travel industry and by their admission they began there due to ease of implementation, the other tools came from the Logistic industry.
Comment by Kimberly Smokey — June 24, 2010 @ 4:44 pm