Many of today’s enterprise resource planning (ERP) were built in the 1990s, while the derivative procure-to-pay systems they inspired were built over the past ten to fifteen years, reliant on the ERP approach, nonetheless. Much of their sourcing through payments architecture is predicated on a world in which the bulk of purchasing activity was for goods, not services.
Yet, today, services make up the majority of what large organizations spend their money to acquire, according to this fascinating webinar from SirionLabs entitled, “Is Procure-to-Pay Destroying Value?” Taking data from Forrester and the US Bureau of Economic Analysis, SirionLabs points out that services make up 58% (or $21.6 Trillion) of “global third-party expenditure.”
Goods are straightforward. If you want to buy 100 pounds of C20000 copper, buyers negotiate a price, suppliers invoice the customer, buyers agree to the invoice, suppliers deliver, buyers verify the delivery of the correct amount and the designated grade, and buyers process the payment. This is procure-to-pay.
Services are their own beast.
They have different business models. One could structure the contract around designated outcomes (“you built the house”), performance (“your call center met the designated service levels during this economic period”), or on a resource-price basis (“you supplied five people to work for three months as developers on our project at a designated hourly wage of $100/hour”).
Services are complex and dynamic. Goods have a single dimension (or maybe a couple of dimensions) to deliver: quantity and perhaps some minimum level of quality, as in the grade of copper above. Services have potentially multiple dimensions of service levels to meet, some of which can change over the course of the contract, as buyers and suppliers adjust the contract to reflect the way in which their ultimate customers behave. And services contracts may be tied to other services contracts or services deliverables for the buyer organization, leading to potentially cascading outcomes. This explodes the complexity of the sourcing and subsequent contract management problems.
Services are not discrete. They are delivered continuously and irregularly. When a buyer engages with a service provider such as a cloud-services provider, they are turning on the pipe. The buyer may consume more or less of the service over time, irregularly and possibly unpredictably.
Services may be difficult to measure. How do you, as a buyer, even know if the supplier has delivered what they said they would deliver? How do you know that you are not overpaying on the invoice consequently? What are the spillover costs to your organization’s growth and other plans from not having been delivered (but still paying as if you did) the full level of service in the invoice?
All of which has two implications.
For sourcing, collaboration between service providers and buyers must start before the contract is signed and extend continuously through the life of the contract, enabling dynamic optimization of the service from both perspectives. Contemporary tools do not contemplate this kind of interaction.
Contract management and downstream services such as invoice processing and payments are much more complex, requiring AI tools such as SirionLabs to extract and reconcile the multiple dimensions of performance in these contracts.
EdgeworthBox is a SaaS-enabled marketplace that is built for this new world. We have layered three sets of tools on top of a marketplace engine: a clearinghouse for administration (primarily consolidated vendor management so that suppliers only must register once); a clearinghouse for data (regarding live and historical RFPs and contracts, enabling market research and more accurate opportunity search); and social networking tools (messaging and profile pages). Coming from financial services, we have built an approach called network-based sourcing™ that revolves around collaboration and dynamic trading environments. It is designed to be used as a standalone service or as a complementary layer on top of existing ERP and P2P systems. Let’s talk about how to improve procurement.