Blog post

7 Avoidable Cost Traps When Buying Services

By Fabian Heinrich
August 12, 2021

Though buying services can be a driving factor in your company’s growth, thanks to the various advantages such as time saved, use of industry experts, etc., certain cost traps loom that you need to be aware of.

Spotting these and eliminating them in the service procurement process will significantly diminish any unnecessary spending and safeguard your bottom-line. Read on to discover how to buy services and engage with providers to your competitive advantage.

Being networked biased in the selection process

On average, how many suppliers or vendors do you consider before buying the services of one of them? Chances are, maybe two or three. And chances are even higher that those two or three suppliers are ones you know from previous projects or they come from within your network.

It’s a time-consuming process if you’re doing it “analogue,” as in, without having any data-driven software tools at your disposal. Operating the selection process with a network or personal bias instead of a merit-based approach is just one of the most common procurement challenges. The pool found in your network is often narrow and perhaps limited.

Supplier selection needs to be much broader, not to mention smarter. This way you can benchmark everything that each provider would be able to offer you against your needs, and find the absolute best value matching to your project at the right time and right place.  

An analogue process promotes gaps in the audit trail and puts compliance at risk

Unfortunately, procurement fraud is more prevalent than we would like to think. In the UK, procurement fraud costs local governments an estimated £876 million a year, which is the main cause for financial loss in the public sector. Private companies are not exempt either – if anything, the lack of a digital process makes it easy for fraudulent activities to fall through the cracks. In other words a holistic single point of truth is missing in order to track and trace.

In another case of compliance deficiencies, the improper following of regulations can get companies into hot water and result in some hefty fines. Therefore, it’s of the utmost importance that suppliers are able to deliver services that are in line with any regulations involved in your field of business.

Vague Statements of Work (SoW) don't prepare for success

A Statement of Work (SoW) is written documentation that explains to contractors, vendors, and service providers what is expected of them, and most importantly, it also sets your project up for success. It must include elements like budgets, timelines, milestones, quality standards, requirements, and other parts deemed necessary.

If everything were filled out in detail, companies would have an easier time managing expectations and getting work back that meets their needs and expectations.

The problem is, this part is skimmed through, especially when there's a time-crunch. However, communication is everything, and SoW is an important document that fully explains what you want. You can’t assume how the deliverables will turn out if you don’t provide all the needed instructions.  We’ve all been there – get the job done, fast, and by any means possible, but unfairly, this way of working is impossible in an analogue manner without the right software supporting you.

Maverick buying wastes valuable resources

This list would not be complete without the cost trap of all cost traps. Maverick buying is when purchases are made outside of the company’s spending policies – or perhaps there were none to begin with. This phenomenon of uncontrolled buying across departments, poor contract compliance, and, ultimately, low benefit realization prevails in many organizations.

One company found that a whopping 80% of all invoices are generated from unmanaged spend. One can usually distinguish 3 types of maverick buying:

  • Purchasing decisions bypass procurement or central processes
  • The Procurement Department is involved too late in the process
  • Existing contracts and suppliers are not used for benchmarking

Milestone oversight is hampering service performance

One of the biggest cost traps arises merely due to a lack of monitoring throughout the delivery of the service. By not tracking progress, bottlenecks are usually not caught until it’s too late, and they’ve likely already created a domino effect that will take time to reverse. The huge difference to material procurement is the fact that a service is always delivered over a period of time.

After all, with time being money, working hours of both internal and outsourced staff will need to be put towards rectifying any issues. That oftentimes is heavily connected to a poorly defined SoW and it’s respective milestones.

Once you have set your milestones, ensuring that each of them is met will greatly increase how productive and cost-effective your collaboration with suppliers really is.

The recallability trap introduces bias to procurement decisions

When procuring services, a forward-thinking approach and plan for the optimal success of upcoming projects take center stage. Though it’s very common to work with suppliers you’ve efficiently worked with before, you may not have assessed how the collaboration could have worked better in the past.

Interestingly, despite having a lot of sophisticated procurement software in place, going back to former projects to optimize current procurement cases does not happen very often in services. Most often, a sophisticated provider performance management over the delivery period of a service is missing.

Therefore, the recallability trap appears as soon as you entrust that the next project will work as well as the last. An easy way to circumvent this is to establish imperative and clear project debriefs after every closed procurement case. This helps to understand what exactly has worked well and where there might be some room for improvement.

Furthermore, before any new service procurement project, every stakeholder should be encouraged to identify and flag the potential improvements from previous projects. This way a continuous feedback loop ensures a high and ever-improving level of quality.

Fewer losses, more wins

Service buying can be a growth hack for companies looking to increase profits, launch products, and scale to larger audiences, but some cost traps need to be headed to make sure that your service procurement experience is smooth sailing.

What kind of cost losses have you experienced and what were some of the ways that you solved them?

Book a meeting with us to learn more about Mercanis.

About the Author

Fabian Heinrich
CEO & Co-Founder of Mercanis

Fabian Heinrich is the CEO and co-founder of Mercanis. Previously he co-founded and grew the procurement company Scoutbee to become a global market leader in scouting with offices in Europe and the USA and serving clients like Siemens, Audi, Unilever. With a Bachelor's degree and a Master's in Accounting and Finance from the University of St. Gallen, his career spans roles at Deloitte and Rocket Internet SE.

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