Service Contracting Methodology – Strategic Sourcing.

With Strategic Sourcing, it is possible to evaluate the total cost of inputs before executing each company purchase

In recent decades, the procurement function has undergone a true revolution. Previously, activities were limited to ensuring the supply of products or services in response to purchase requisitions issued by internal requestors, and relationships with the supply market were characterized by personal ties.

Today, positions such as Chief Procurement Officer (CPO) or Vice President of Procurement are common in large organizations, reaching a level of strategic importance and being recognized for their ability to help companies achieve long-term results.

Therefore, to meet the expectations placed on this “new” role, buyers must seek effective methods for procuring services or purchasing products.

In addition, buyers face another challenge that increases the complexity of services procurement: the proper way to evaluate the performance of the contracted service. Due to its inherent intangibility, a service cannot be evaluated by the same criteria as a delivered product, whose prototype can be measured and assessed, when applicable.

In other words, there is no exact way to evaluate a service, either before or after its utilization. Because of this, in most cases, suppliers themselves are responsible for outlining to the buyer what can and cannot be done, given the variables provided in the Strategic Sourcing process.

• Strategic Sourcing

We understand Strategic Sourcing as a process that systematically identifies potential sources of supply for the products or services required by the company, technically evaluates, negotiates, and contracts suppliers with high transparency, and continuously manages the relationship with them, with the goal of increasing the purchasing company's competitiveness.

The use of Strategic Sourcing has enabled companies to achieve significant gains in purchase price reduction, supplier base consolidation, and improvements in the level of quality and service delivered to the end customer.

• Developing the Scope

When procuring services, we must first approach the process as a project, and, as in any project, establishing the scope is the most critical aspect.

Any missteps in coverage or in the level and depth of detail can lead to unpleasant consequences regarding costs, timelines, communication, and risks.

In a survey conducted by Level Group with 30 contract managers or heads of services procurement processes across various market segments, 80% stated that the lack of a clear, well-defined scope is the greatest challenge in Strategic Sourcing projects for services procurement.

Two aspects that the buyer or service procurement project manager must consider regarding scope deficiencies and their potential consequences are:

Incomplete Scope

Often, the services or sub-services being contracted are not properly identified. For an accurate scope definition to be possible, project leaders must ask themselves whether all components necessary for a complete understanding of the scope's composition are sufficiently described.

Lack of Clarity

A major mistake for a buyer or manager is to assume that the scope is clear to everyone simply because it is complete. This is a common pitfall in competitive bidding projects for services procurement that can be easily revealed by asking questions to stakeholders with different profiles to check their understanding and interpretation of the provided service information or specifications.

• Data Collection – Service Scope

To build the scope of the service involved in the sourcing process, it is necessary to gather some basic information:

1. Location of the sites where the services will be performed.
2. Detailed description of service delivery locations (sector, square footage, operating hours, number of employees).
3. Contractor and client responsibilities.
5. Schedule for carrying out activities.
6. Management system.
7. Materials for service provision (description and responsible party for costs).
8. PPE and uniforms (description and responsible party for costs).
9. Third-party employee transportation (responsible party for costs).
10. Third-party employee meals (responsible party for costs).
11. SLA (Service Level Agreement).
12. Performance measurement indicators.
13. Targets for each performance indicator.
14. Penalties in case of non-compliance with targets.

The scope development model varies greatly according to the type of company, type of project, and the style and authority of the buyer or manager. Therefore, defining the best way to develop the scope is not an easy task.

Even so, we have established gradual scope development as a highly effective best practice. This model typically delivers excellent results in drafting scopes for Strategic Sourcing projects.

Below, we highlight four reasons why over-specifying the scope at the very beginning of a Strategic Sourcing project for services procurement is not worth the effort:

• Requirements will be overstated;
• The scope will remain incomplete;
• Rework will increase;
• Unrealistic expectations will be created.

Having stated the reasons why developing the scope gradually is more suitable for sourcing projects, it is up to the buyer or procurement project manager to determine the exact level of scope desired for the contracting process. Importantly, the scope in more advanced phases should be defined more broadly and allow for at least:

• Properly guide the activities that represent the service to be contracted;
• Estimate the total cost and timeline of the services to be contracted, using preliminarily quoted values or current benchmarks as a reference;
• Identify high-probability or high-impact risks that should be addressed from the beginning of the Strategic Sourcing project.

Beyond the issue of accuracy in scope refinement and its proper understanding by the supply market, throughout the Strategic Sourcing methodology, it is essential to use tools for an accurate evaluation of service providers—such as the Technical Decision Matrix—as well as to work with procurement techniques best suited for services, including data collection, market analysis, RFP preparation, quoting, distortion analysis, quoted scope, TCO (Total Cost of Ownership), negotiation, and finally contract drafting and supplier phase-in/phase-out.

If this process lacks the necessary depth, operational and financial risks may be assumed throughout the life of the contract. Even with a pragmatic application of the methodology, it is rarely possible to eliminate every risk in a procurement process; however, portions of them can be mitigated or at least identified so that contingencies can be established during the contract term.