Why it is important to understand the difference between direct and indirect procurement.
What do you think of when you think of procurement? If you are like many people, you think of cost savings and/or contract negotiations. But the new era of procurement has become more strategic in nature. Procurement professionals can not just look at old price and new price anymore. They need to understand the total cost of ownership.
At Procurement Concepts, we believe that you get what you pay for, especially in the professional services industry. Let's use law firms as an example. To simplify this, imagine your company is owed $1 million by a client who refuses to pay. You solicit bids from 3 law firms.
- Firm A: Proposes an hourly rate of $150/hour and estimates 150 hours ($22,500)
- Firm B: Proposes an hourly rate of $200/hour and estimates 200 hours ($40,000)
- Firm C: Proposes a $300/hour and estimates 250 hours ($75,000)
Before answering the question, we highly suggest looking at the probability of success and the reputation of the law firm. Ask the firm a few questions around performance and service levels. For example, based on historic data, what is the probability of recovering all $1 million? What other fees will we incur (mileage, copies, filing fees, etc)? Who will be working on the case (partner, associate or paralegal)? How can we be sure your firm won't bill more than the proposed hours?
What if firm A is able only able to collect $500,000 within the hours proposed? Then your company nets $477,500. If Firm C is able to collect all $1 million within the hours proposed, paying the highest price of $75,000 is definitely worth it. In our experience, many companies would just look at cost (and would have selected firm A).
In addition to costs, Procurement Concepts analyzes service levels, performance requirements, and success rates for our clients. Please let us know how we can help your company reduce costs while increasing performance!