Procurement Speak: Know your SOWs, VMSs and MSPs
It’s always been critical for procurement pros to stay ahead of the game… and the terminology of services spend. We’ve decided that it’s time for a refresher, and we’ve enlisted the help of Guidant Global’s Michael Feild, to take us through what we need to know.
When it comes to developing a savings strategy, most organisations aren’t optimising the services of their outsourced providers. In other words, there’s a good chance your company is missing out on massive cost savings!
The first step to rectifying this is knowing what you’re dealing with. So, some definitions:
The top three terms to get familiar with
Statement of Work
A statement of work, or SOW, is a document used in project management to define the scope of the work being done, by whom, to what deadlines, and for what price. SOW is becoming an increasingly popular way to procure external services, largely because the services provider takes on the risk of delivery.
There are two phases in SOW services procurement: source-to-contract, when a supplier is searched for and engaged; and contract-to-invoice, when the supplier delivers and is paid for the agreed work. These are also referred to as ‘upstream’ and ‘downstream’.
Vendor Management System
A vendor management system, or VMS, is an online platform that businesses use to find, hire and manage their external workforces – from temporary workers to services providers on SOW contracts. When it comes to SOW, a VMS is used to define projects, distribute requirements to potential suppliers, and to approve project milestones and payments.
Managed Services Program
The letters MSP can be used interchangeably to mean either managed service provider or managed service program. The ‘provider’ is a workforce solutions specialist who typically provides the ‘program’, which is the wider strategy for managing a business’s external workforce and incorporates both a VMS and – increasingly – the use of SOW.
In the rest of this article, I’ll use MSP to refer to the provider.
Why do I need to know these terms?
Statement of work is finally having its moment. Thanks to a unique combination of pressures, the urgent need for control and value from all categories of spend is driving record adoption of SOW services procurement over expensive time-and-materials engagements.
What’s even more encouraging is that increasing numbers of organisations are now managing their SOW spend within their MSPs, and benefitting from the greater visibility, compliance, and cost savings this brings.
But here’s the catch…
… Many firms are simply moving their incumbent supplier engagements into their vendor management system, without leaning on the expertise of their managed service provider. As a result, they’re passing up the chance to make substantially higher savings.
So, with the lingo under our belt, let’s look at what an MSP brings to the source-to-contract stage of a SOW transaction to help make game-changing cost reductions.
1. Get smart – build your market intelligence and understanding
Moving statement of work services procurement into a VMS is the first step towards gaining full visibility and control over an historically-hidden area of spend. With a wealth of data suddenly available to them at the touch of a button, procurement teams can begin to see which incumbent suppliers are providing value and quality – and which ones are not.
But it goes without saying that your incumbents represent just a fraction of the supplier universe. By continuing to hand contracts to known suppliers without an understanding of who else is operating in the market (and at what rates), organisations are leaving money on the table.
Bringing in an MSP at the source-to-contract stage gives you access to a wealth of understanding and insight about alternative options and going market rates. And by soliciting competitive proposals from suitable candidates, an MSP can start to negotiate much more favourable terms for your business.
2. Avoid falling into a value trap – rate negotiation and contract drafting FIRST
Supplier agreements are one of the biggest statement of work risk areas for procurement teams. When different hiring managers engage their suppliers on wildly different terms, it becomes impossible to tell where you’re getting value for money and where you’re paying way above the market average.
By negotiating contracts and prices at the sourcing stage, before a supplier is chosen and engaged, an MSP drives more favourable and consistent commercial terms. Market intelligence, expert rate benchmarking, and years’ of supplier management experience make this possible. It’s unrealistic to expect your departmental managers to have these skills or know-how.
Engaging an MSP, whose entire role revolves around understanding, managing and negotiating with suppliers, makes better commercial sense than giving these responsibilities to people for whom supplier management is simply an off-shoot of a much different role.
3. Choose the winners – supplier evaluation and selection
With their expert insight and knowledge of the market, an MSP will help you shortlist suppliers, review and score their RFP response bids, and identify the most suitable candidates for your project.
The financial benefits of bringing this level of competition to your statement of work services procurement are obvious, but there are advantages from a compliance and risk point of view also – and even these can translate into bottom line savings.
An MSP’s upstream support extends to the fundamentals of the project itself, from scope and milestones to worker classification – something that’s especially important in the UK in the post-IR35 landscape and that has always been crucial in the US thanks to the somewhat ambiguous ‘guidance’ of the FLSA.
By mitigating the risk of misclassification, reducing the potential for incorrect channel buys, and ensuring full onboarding compliance, an MSP drastically reduces your chances of incurring non-compliance fines and penalties.
The ultimate question… What savings can I expect to make?
Simply by making the switch from manual, email-based statement of work management to handling their relationships with incumbent suppliers in a VMS, most procurement teams can make very reasonable savings – how does 5-7% of current spend sound?
These are not insignificant numbers.
But in this challenging environment, when procurement teams are under so much pressure to reduce costs, single-digit percentage savings will not make the difference they need.
By leaning on the market understanding and specialist negotiation skills of an MSP before a contract is signed, our experience tells us most organisations can save between 12 and 25%. How does THAT sound? That’s a huge competitive advantage that no procurement leader can afford to overlook.
Michael Feild is VP Services Procurement at Guidant Global.
Want more on how to reduce costs using supplier relationship management? Have a read of this!
