Reducing the Costs of Purchased Services

Services spend is often considered a secondary target for cost reduction, yet studies suggest that services spend can account for 30 percent to 70 percent of an organization's total purchase dollars. Fearon and Bales (1995) state that " the opportunity to increase profits through more effective purchasing probably is greater in the buying of services than in the purchase of goods. " A logical step in overall cost reduction strategies is to focus on purchased services. A review of the available literature revealed a number of strategies that organizations can use to reduce the cost of purchased services, with each strategy producing varying results. Some potential strategies include: exploiting volume aggregation; committing to supplier development and relationship management; adopting integrated sourcing and procurement strategies that increase an organization's control of services purchases; recognizing the differences in complexity between purchasing materials and purchasing services to assign the most appropriate supply professionals to each category; exploring opportunities to participate in group/consortium buying; potentially outsourcing some or all of the responsibilities of purchasing services to a third party; and using reverse auctions. Each buying organization should carefully select the cost reduction strategies it will use based on its particular needs, strategic goals and competencies.