Last updated on December 7th, 2022
When it comes to running a business, I’ve seen one type of cost that catches a lot of owners out – procurement costs.
I’ve met plenty of people who either overlook procurement or simply don’t understand it fully. So, after covering procurement costs in a previous article, I’ve decided to go more in-depth with service procurement here.
This is a quick guide to service procurement (see also, ‘What is Global Procurement?‘) so those who are struggling to understand it will hopefully have a useful source of information here. Take a look, and I hope it helps clarify some things for you!
What Is Service Procurement?
First, let me break down what procurement itself is. From there, it will be much easier to explain what service procurement is – I had to do the same when learning all the business jargon early on in my career.
So, what is procurement?
Procurement is the part of running a business which involves sourcing and obtaining goods and services from other suppliers to help support a business’s operations.
Procurement is actually a lot more complicated than many people originally think as it’s not just about buying and selling goods.
There are a lot of steps in procurement including sourcing, negotiating prices, inspecting goods, and recording every step of the process.
There are two main types of procurement. These are:
- Direct Procurement – This is the process of obtaining all the things needed to produce an end-product, usually the one the company is selling to its customers.
- Indirect Procurement – These are the things that a business needs to support its daily operations like equipment, office supplies, marketing and advertising resources. Although they are not directly linked to the end-product, they are still vital for the business.
Because procurement covers so many different areas of a business, the industry itself is pretty huge.
In 2022, the global procurement market is projected to reach $13.58 billion by 2030.
80% of Chief Experience Officers (CEOs) claim that they think procurement has helped them make strategically valuable contributions as a KPI – so, many business owners agree that procurement is an important part of their business.
Procurement’s range in areas also means that it is sometimes broken down into two further categories.
- Goods Procurement – This refers to procuring actual physical goods which can be for both direct and indirect procurement purposes.
- Service Procurement – This refers to sourcing people-based services for both direct and indirect procurement.
And this is where service procurement comes in.
Defining ‘Service’ Procurement
So, service procurement is a type of procurement which involves sourcing people-based services to help a business function.
Companies large and small carry out service procurements to help them function day to day (in fact, larger companies are 66% more likely to outsource than smaller companies), and they can range in all types of fields.
These are usually services that the business itself cannot perform either due to a lack of expertise or limited time and resources.
Because the business owners or their core team lack the skills, they hire external consultants to specialists – this is service procurement!
Here are some common examples of service procurement:
- Marketing Services – This is a type of service procurement I am familiar with as a digital marketer. Some companies are made of a core team which knows nothing about marketing or PR so they outsource their marketing.
- Human Resources – HR is another one. Some businesses don’t have time to look for new employees or to manage them, so they outsource it instead.
- Finance – This includes accountants, consultants, and financial advisors to help oversee the finances of the business.
Basically, service procurement is used as a type of strategic outsourcing and it has a ton of different benefits – but also some pitfalls businesses need to watch out for.
The Pros And Cons Of Service Procurement
Service procurement offers a lot of benefits for businesses who choose to outsource certain areas of their business. But, nothing is perfect, so here are the pros and cons of service procurement for you to be aware of.
The first is an increase in quality. If you want your business to be a success, then it’s best to leave the areas you are not familiar with to the experts.
After all, if you try to do it all yourself, you will be super short for time and the end results likely won’t be as effective. So, many businesses find a service provider for an area of business they are not confident in – usually marketing or financing.
This also helps business owners free up a lot of their time to focus on multiple projects or other areas of their business they are more confident in.
They spend less on getting someone else to provide higher quality services for their business.
However, one drawback of outsourcing services through service procurement is that projects are less likely to be completed on time or on budget.
A report by SAP Fieldglass found that 1 in 4 projects done by service providers were not completed on time or within budget.
Another downside to service procurement is that although it’s proven to cut costs, smaller businesses struggle to find the funds for outsourcing.
This is likely why larger companies are more likely to outsource some of their business processes – because smaller companies who are more strapped for cash are forced to do it themselves.
So, service procurement (see also, ‘What is Procurement Contract in Business?‘) is not for everyone although it offers a ton of benefits that can help your business grow.
It’s typically done so businesses can hire a professional to carry out important business processes so if you are struggling with the marketing or financial side of your business, it’s possible to use service procurement to outsource them.
But, this will require a budget, and so it’s not accessible for all small businesses.
I hope this has helped you understand what service procurement is and how it can impact your business!