Services represent one of the biggest portions of corporate spending. How companies manage and contain "services spend" is a significant concern in all sectors of the economy. To calculate just how much of the total purchase spend goes to services and how different companies manage this amount, CAPS Research—a global research organization—conducted a benchmarking study.

The study revealed that from an overall spend management perspective, services spend represents 11% of total revenue and 30% of the total purchase spend. Fifty-two organizations participated in the survey, with 20 of them excluded from the results because they provided insufficient or unverifiable data. The median total revenue/sales for survey participants was $4.02 billion, with respondents spending a median of $434 million on services.

The survey also looked at how much organizations spent on direct goods—which CAPS Research defines as "goods that can be identified with individual units of output"—and indirect goods—those that are "not directly identified with specific products but related to the normal operations of an organization." The survey indicated that direct spend generally exceeds indirect spend. While direct spend accounts for 18% of total sales dollars and 44% of total purchase spend, indirect spend represents 9% of total sales dollars and 23% of total purchase spend. Furthermore, when it comes to managing their direct, indirect and services spend, respondents indicate that they are more centralized, as opposed to decentralized, hybrid or outsourced.

During the next five years, the participating organizations expect to increase their services spend by roughly 13% on average. More than half (58%) say their services spend will likely go up by 22% on average, while only 13% say that it would likely decrease, with that decline averaging 4%. The rest expect no change in their spend for services during the next five years.

In the report, CAPS Research broke down services spend by functional category and found that the following categories accounted for the biggest percentage of total purchase spend:

Manufacturing (20.24%)
Other (8.49%)
Inventory (7.93%)
Professional Services (7.61%)
Construction/Engineering (6.04%)
Information Technology (5.24%)
Marketing (5.13%)
Logistics (4.94%)
Real Estate (4.25%)
Advertising (3.00%)

Participating organizations also report that they use formal services supplier management programs for specific categories, such as construction/engineering (53% of respondents), facilities management (35%), logistics (31%), warehouse management (25%) and inventory (11%).

A majority of participants (70%) indicate that they find buying services more difficult or very difficult when compared to purchasing goods. In fact, not a single respondent finds procuring services easier to do than procuring goods. Not surprisingly, 75% of respondents think it's more difficult to manage the delivery of services than to manage the delivery of goods. Moreover, when asked to rate their competence in sourcing, procuring and managing both services and goods on a scale of 1 to 5, participants give themselves higher marks when it comes to sourcing, procuring and managing goods (a weighted score of 4.5) compared to an average of 3.65 for services and 3.45 for bundled goods/services.

Most companies report that they use software solutions for buying and managing goods and services. For example, a whopping 94% have adopted procurement software to buy and manage indirect goods, while 88% have taken the software route to buy and manage direct goods. Meanwhile, 84% of participants report using software to buy and manage services and 72% rely on software for services bundled with goods. Percentages are also high when it comes to buying and managing direct goods bundled with services and indirect goods bundled with services, with 69% and 71% of respondents, respectively, saying they have implemented software solutions.

When asked to rate their competence in utilizing procurement software to support and manage direct goods, indirect goods, and services on a scale of 1 to 5, participants give themselves a higher score for goods (4.0 for direct goods and 3.7 for indirect goods) than they do for services (3.22), reflecting their belief that their existing software is less adept in managing services spend as opposed to direct and indirect spend. CAPS Research also probed into the likelihood that the participating companies will invest in new software systems and tools during the next 18 months. The weighted score of 3.03 revealed an average probability of new investments, with the results coming in at 3.1, 3.0 and 3.0, respectively, for direct goods, indirect goods, and services.

Finally, CAPS Research looked into the companies' procurement methods, exploring how frequently they used master service agreements (MSA), written requests (RFx documents), direct sourcing (sole source or single source) or other methods. On average, 82% of respondents rely on master service agreements for temporary staffing, information technology and telecommunications. Meanwhile, 58% acquire these same services through RFx documents and 50% get these three services through direct sourcing. Only 15% used other procurement methods to obtain these services.

Source:

Managing Your "Services Spend" in Today's Services Economy
CAPS Research
Release Date: July 22, 2003
Quantitative Report
Narrative Summary

CAPS Research is an independent global research organization that provides leading-edge research and data on purchasing and supply chain management. CAPS Research was established in 1986 by the Institute for Supply Management and the W.P. Carey School of Business at Arizona State University.

Contact CAPS Research for further information on this benchmarking report, or for additional information on how to participate in future benchmarking surveys. Elance, Inc. sponsored this benchmarking effort.