Where Do SOW Savings Come From?
Today’s Answer: CONTROL
There are three capabilities that serve as the foundation for successful sourcing and category management activities within the services procurement function:
Control - the ability to leverage the sourcing process into a strong contract and to maintain compliance with that contract.
Coverage - the portion or scope of spend under active management.
Visibility - the company’s ability to capture, report and leverage relevant statement of work (SOW) spend data to identify vendor, category, and efficiency-based cost savings.
This series of posts about procurement savings is focused first on Control. Some would argue that visibility and coverage actually come first in the savings life cycle. Fair enough, but at SFS we believe in first looking forward to ensure “control gates” are in place to protect and realize the savings our sourcing consultants work so hard to identify and negotiate. Understanding how savings are realized, and conversely how they can be lost when control is absent, helps inform the design of a best-in-class SOW program.
Control is a powerful capability
Control is the ability to reduce or eliminate leakage (a common U.S. term that describes waste or inefficiency). Leakage is undesirable relative to SOW spend management and comes in two basic forms worth exploring. Using the SOW Savings chart as a guide…
Sourcing leakage- when savings have been identified during sourcing but for some reason are not captured in the SOW or contract. (It happens!)
Contract leakage- when payments do not comply with contract terms. (It happens all too often!)
Savings are generated through sourcing and contract negotiations. Control of a sourcing event or a category is the ability to ensure negotiated pricing or other preferred terms (i.e. savings) actually make their way into contracts or SOWs. We call this captured savingsbecause the terms driving the savings have made it into the executed contract. Practical application: having the ability to centrally control or push out a negotiated supplier rate card or an SLA (service level agreement) to the entire organization in a timely and usable manner maximizes category control and minimizes sourcing leakage.
Contract control or compliance is the ability to sustain the commercial terms agreed to in the contract. Therefore, contract leakage manifests itself in two ways generally:
Lack of adherence to service delivery expectations. Practical application: SOW amendments that add more dollars to the SOW amount while leaving the SOW scope or deliverables unchanged (or worse yet, scaled back). The amendment may actually be a necessary change for the success of the project or it may be the result of a lack of enforcement of the original contract terms. The effect though is the same, an erosion of captured savings – i.e. savings not realized. (Yes, this does raise the question of the “quality” or “probability” of the savings captured. To be discussed another day.)
Operational Waste – i.e. operational errors and inaccuracies when processing invoices and payments. Practical application: Automating the SOW invoice and payment processes and linking them directly to contract terms is the best way to maximize contract compliance and virtually eliminate contract leakage.
SOW control within the context of the contingent labor program starts with a thoughtful solution design that fully leverages a VMS (or some other procurement technology) for post AND pre-award SOW management activities. Technology alone cannot fully deliver control, though. The service team that utilizes the technology, whether that team is internal or external, must understand and accommodate the relationship between savings and control. Without control, spend data visibility and the amount of spend under active management (coverage) will have significantly limited impact on the success of the program.
SFS understands and appreciates how savings are generated and how they are realized. Contact SFS today if we can design for your company an SOW program based upon control, coverage and visibility.