One of the most important steps in strategic sourcing is establishing a baseline for the spend profile you intend to negotiate. It seems like the easiest step as well, a baseline is, simply put, a current state assessment of the spend profile including a qualitative and quantitative overview. Some categories are easier to baseline in nature due to the type of information and how it is tracked traditionally by a company or its suppliers. One example is Utilities spend, you can easily determine from a contract and a handful of invoices what the current rates are and get a good idea of usage. The information is historically tracked due to the nature of the costing model within the supply base.
Other areas, such as many of those identified as Facilities Management spend are not as simple. Within this category companies are oftentimes managing multiple suppliers of varying levels of sophistication. This category is also heavily service oriented and based often on time and materials cost models. Unless the suppliers are set up with the expectation of tracking information such as labor hours spent per job, both capital and ad hoc work, materials costs by line item including markup and unit cost, and any ancillary fees assessed - they likely will not track this information for their own records. This is especially the case for those "mom and pop shops" using off the shelf technology to quote and invoice their customers.
So what does this to mean to you, the procurement professional? Worst case scenario is that it puts you in a very difficult position when attempting a solid sourcing effort. Without data such as typical labor hours billed within a specified time period, it will be very difficult to forecast savings results on a labor rate reduction. The same goes for materials markups, without a detailed list of materials used including quantities and markup structures, claiming savings on this spend will take some creativity.
With that said, it is not impossible. At the baseline stage it is important to identify the gaps in data that might create these challenges and develop a methodology for calculating savings that Finance will support and recognize. Please also keep in mind that data not available historically does not limit your ability to recoup these savings in the future through contracting and billing best practices applications. One of which includes requesting that moving forward all invoices are detailed at the line item level so that in quarter or six months the data can be revisited for analysis or sourcing. Contracts should also include language binding suppliers to provide more visibility into how they are costing jobs so that an apples to apples comparison can be made in the future.
More challenges to come in the next blog, but in the meantime check out our website for more information on sourcing in the Facilities Management category.