2 Breakout Session #1609 April 16, :50 – 11:50 Strategic Sourcing of Professional Services Mr. Lido Ramadan Director Censeo Consulting Group Mr. Jim McIntosh Director Censeo Consulting Group

3 What is Strategic Sourcing? DEFINED BYSTRATEGIC SOURCING DEFINITIONS Public Sector Strategic Sourcing Roundtable (Session 4, January 13, 2005) Strategic sourcing is NOT….an answer…it is NOT leveraged buying.. Strategic Sourcing IS…  A PROCESS for systematically analyzing and developing optimal strategies for buying goods and services.  DATA DRIVEN – fact-based analysis to drive decision making rather than just “hunches”  HOLISTIC process that addresses customer needs, market conditions, organizational goals and objectives, and other environmental factors  Based on MARKET INTELLIGENCE and takes into account small business capabilities  Inclusive of CUSTOMER REQUIREMENTS  A CROSS-FUNCTIONAL APPROACH  About SUPPORTING AN ORGANIZATION’S MISSION through procured goods and services  About DEVELOPING ORGANIZATION WIDE STRATEGIES

4 What are Services? Services have evolved from stand alone service buys to include traditionally purchased materials with a services component & outsourced business processes  Traditional Examples –Temporary services –Consulting services –Building maintenance services  Newer Examples – previously purchased as materials –Print capability (Printers & value- added services/maintenance)  Newer Examples – outsourced business processes –Internal HR activities –Internal Accounting activities Services Sourcing has become even more complex and pervasive – one of the more complex of these types of services is “Professional Services”…

5 What are Professional Services? Professional services cut across a wide range of services, such as Management Consulting, Architecture and Engineering  Professional Services –Sourcing attributes: Competed on skills, experience, and reputation Performed on a project or infrequent basis (in some instances, especially in the federal government, professional services can be characterized as ongoing, acquired as staff augmentation) Professional skills (often requiring certifications) Non-commoditized –Examples include: –Management Consultants –Environmental Consultants –Marketing –Doctors and Lawyers

6 Challenges for Professional Services Sourcing Among the Many Challenges of Sourcing Professional Services 1.Defining Requirements – Breadth vs. Expertise 2.Defining Requirements – Prescriptive vs. Outcome-Based 3.Evaluating and Selecting Suppliers – Maintaining Objectivity 4.Measuring Supplier Performance Based on Censeo research and experience across many industries

7 1. Defining Requirements – Breadth vs. Expertise Key Considerations  What is the level of skill/expertise required to meet customer objectives?  Are the Professional Services required supported by the same supply base?  How differentiated are niche/focused suppliers from suppliers with broad capabilities? Issue: Should we set up relationships that cover a breadth of services or should we segment out requirements into niche categories? How to Address  Approach that simultaneously incorporates:  Deep understanding of customer requirements and need for skill level/expertise  Market analysis focused on differentiating niche suppliers and broad capability suppliers

8 2. Defining Requirements – Prescriptive vs. Outcome-Based Issue: Requirements are often either too detailed and rigid, or too vague and incorrect Challenge: Suppliers often possess the expertise Key Considerations What is the problem that needs to solved and what types of expertise/skills are required to address the problem? Most important - What are the objectives and desired outcomes? What objective measures can we use to gauge value? Striking the appropriate balance between being overly prescriptive and providing suppliers flexibility is critical

9 3. Evaluating and Selecting Suppliers – Maintaining Objectivity Issue: Customers become reliant on and often tied very closely to particular suppliers, leaving little room for objectivity How to Address Revisit Goals and Objectives –Accurately determine the criteria for meeting customer goals. In addition to general capabilities, we must fully understand the levels of expertise needed and the context for applying that expertise. Conduct Market Analysis – Go beyond general capabilities to understand supplier experience and expertise that is context specific Research Best Practices – Understand best practices specific to the problem at hand Hold Supplier Meetings – Develop requirements and evaluation criteria prior to holding meetings and allow suppliers to provide feedback and comments Develop Comprehensive Supplier Scorecards – Determine which factors are most important for evaluating supplier responses and weight them accordingly The steps above are applicable to many commodities, but are very relevant to, and can be tailored to Professional Services

10 4. Measuring Supplier Performance Issue: Given the intangible nature of Professional Services, measuring supplier performance is quite difficult How to Address Performance Measurement should be as much a part of the procurement process as are requirements and technical evaluations Specific metrics should be “tied” to each outcome, with consideration of risk Prior to contract execution, all criteria should be agreed to and discussed in detail

11 Case Study – Environmental Services Environmental Services include: Cultural Resources (e.g., Archeological, Historical, and Cultural Surveys, Investigations, and Evaluations) Natural Resources (e.g., Biological Assessments, Threatened and Endangered Species) Environmental Compliance (e.g., Air, Water, Hazardous Waste, Other) –Scope includes studies, permit updates, sampling, training –Excludes Compliance Cleanup and waste transport/disposal Management & Professional Services (e.g., Admin, Project Management, Staff Augmentation)

12 Environmental Services – Spend Profile ENVIRONMENTAL SERVICES SPEND BY CATEGORY Projected Total FY09 = $257 Million Source: Censeo Analysis Environmental services performed at 109 locations throughout the world Largest location covers 3,200 square miles; smallest location covers only a few square miles Spend includes non-recurring and recurring projects in support of four primary Environmental Service components Total U.S. Contracted Environmental Services spending is estimated to exceed $250 million annually

13 Environmental Services – Market Analysis COST STRUCTURE – ENVIRONMENTAL CONSULTING SERVICES (%, 2006) Labor (including wages, contractors, and subcontractors) is the most significant component of costs The consulting segment of the industry requires an in-depth understanding of regulations but limited fixed investment, resulting in a proliferation of small businesses The market is characterized by overcapacity, commoditized offerings, and growing buyer sophistication, all leading to pricing pressures Source:Censeo Primary Research KEY FINDINGS

14 Defining Requirements – Breadth vs. Expertise: Four separate PWSs focused on specific expertise The contractor shall provide technical assistance with environmental compliance requirements in six broad categories: (1) Survey, inventory, or investigation… 1.SURVEY, INVENTORY, OR INVESTIGATION a)Provide accurate and current site-specific data, analysis, and compliance recommendations in the format required for compliance or program management by the required deadline. Example products include permit applications, legally required plans such as Spill Prevention, Control, and Countermeasures Plan, legally required reports such as the environmental closure liability, and studies for meeting new or existing compliance requirements.

15 Defining Requirements – Prescriptive vs. Outcome-Based ENVIRONMENTAL SERVICES WORK STATEMENTS – HIGH LEVEL OVERVIEW Traditional Approach –Individual locations developed individual project requirements, not necessarily using a performance-based approach –Emphasis on individual roles, especially for staff augmentation –Emphasis on activities and tasks –Emphasis on ensuring location compliance with all applicable environmental laws and regulations –Range in level of detail from very generic to extremely detailed Outcome Based Approach –Significant similarities in requirements across locations to be leveraged in development of standard Performance Work Statements –Emphasis on describing types of work and outcomes/deliverables –Emphasis on compliance with standard field procedures and on ensuring location compliance with all applicable environmental laws and regulations –Performance objectives include functional/technical accuracy and completeness, meeting required deadlines; –NET RESULT: Consistent, high-quality outcomes; improved spend visibility –NET RESULT: Fragmentation and variation in contracting for Environmental Services; prescriptive specifications

16 Evaluating and Selecting Suppliers – Maintaining Objectivity ENVIRONMENTAL SERVICES - APPROACH TO DEVELOPING THE PWS Three Common Factors The Bubba Factor – “But you don’t understand, I really need Bubba to work on this. No one else can do the job right.” The “But I play one on TV” Factor – “I know you’re the contracting officer but let me tell you how we should do this” The Supplier as Contracting Officer – “You know what, I really don’t know how to develop these requirements, why don’t you develop them for me” Approach Leverage Internal Expertise – Identified internal and external subject matter experts to assist in developing the PWs Focus on Outcomes and Deliverables – eliminated any references to specific suppliers and how tasks were performed in the past. Focused solely on the outcomes and deliverables required Cross Functional Team with High Level Management Support – formed a team that included all stakeholders and was sponsored at the highest level

17 Measuring Supplier Performance Metrics Compliance Ratings – outside validation of performance SLAs –Quality of deliverable –Timeliness of deliverable Feedback and Customer Satisfaction –Skill level of resources Outside evaluation and benchmarks –Industry benchmarks/quality measures –Third party evaluation Requirements Overall Objectives – e.g. Compliance with Regulations Deliverables Resources and Skills Quality and Performance