Is procurement in the service industry overlooked and undervalued?

Procurement plays a crucial role in ensuring that the right materials and services are obtained at the right price, quality, and time, supporting the overall success and efficiency of the business. Procurement can involve purchasing raw materials, equipment, or even outsourced services, and it works closely with other departments like finance, operations, and marketing to ensure alignment with business objectives.

The Global Procurement As a Service (PaaS) market is expected to grow from US$ 7.03 billion in 2024 to US$ 15.12 billion by 2031. This growth is driven by businesses seeking to optimise their procurement processes, reduce costs, and streamline operations through outsourcing.

Procurement has traditionally been seen as a back-office function, with little visibility or involvement in strategic decision-making. However, this perception is changing, as businesses increasingly recognise the value of procurement in driving cost savings, innovation, and operational efficiency.

In the service industry, procurement faces unique challenges such as the need to manage a diverse supplier base, ensure the quality of intangible services, and navigate the complexities of service contracts. Despite these challenges, procurement is vital in maintaining service quality, managing supplier relationships, and ensuring cost control, ultimately contributing to the success and sustainability of the business.

A significant 74% of supply chain leaders have increased their investment in supply chain technology and innovation. This trend reflects a broader shift towards automation and data-driven decision-making, helping procurement teams optimise sourcing, improve efficiency, and reduce risks in the supply chain. As businesses face increasing pressure to adapt to changing market conditions, leveraging technology becomes a key enabler of success.

Understanding procurement in the service industry

In service-focused businesses, procurement is crucial for ensuring the continuity of operations, optimising service costs, and maintaining high standards for customer satisfaction. It involves a wide range of activities, from outsourcing IT support to negotiating contracts for marketing services or facility management.

Effective supply chain risk management is essential for any business, but in the service industry, it has an even greater impact on company brand value. Research shows that robust risk management in the supply chain can deliver over 70% additional value to a company’s brand. By proactively identifying potential disruptions—whether from suppliers, geopolitical factors, or market shifts—companies can protect their reputation, ensure consistent service delivery, and avoid costly disruptions that could harm customer trust.

Key differences between procurement in the service industry vs. manufacturing or retail

• Intangibility: Unlike physical goods, services are intangible, which makes it more challenging to define and measure the quality of what is being procured. Procurement in the service industry often focuses on evaluating the skill set, experience, and reliability of service providers rather than product specifications.
• Long-term relationships: Service procurement typically involves long-term relationships with service providers, particularly critical services like IT support, logistics, or facilities management. In contrast, procurement in manufacturing or retail might be more transactional, focusing on purchasing raw materials or finished goods.
• Customisation: Service contracts often require more negotiation and tailoring to specific business needs, while manufacturing or retail procurement typically involves standardised products. This requires a deeper understanding of business processes and often a closer collaboration with suppliers in the service sector.
• Risk management: Procurement in the service industry must navigate risks related to service delivery, including performance issues, compliance, and legal considerations, whereas in manufacturing or retail, the focus is often on managing the availability and quality of raw materials or products.

Service industry sectors relying heavily on procurement

Procurement not only ensures the availability of critical services but also helps to manage costs, mitigate risks, and drive operational efficiency. As businesses continue to expand and adapt to new challenges, procurement plays a central role in supporting the strategic objectives of service-oriented companies.

1. Hospitality: Hotels, resorts, and restaurants rely heavily on procurement to source services such as cleaning, catering, facility maintenance, and staffing. Procurement also plays a role in managing suppliers for furniture, equipment, and technology services.
2. Healthcare: Hospitals and healthcare providers procure a wide range of services, including medical staffing, equipment maintenance, cleaning, IT systems, and medical waste management. The procurement process is critical to ensuring patient safety, regulatory compliance, and cost efficiency.
3. IT services: Businesses in the IT sector depend on procurement for a variety of services, from software licensing to cloud computing, infrastructure management, and cybersecurity. Given the rapidly evolving technology landscape, procurement in this industry must be agile and future-focused.

Why procurement in services is often overlooked

Despite its critical role in business success, procurement in the service industry is frequently underestimated or overshadowed by other functions. Several factors contribute to this oversight:

Intangible nature of services

Services, unlike goods, are intangible and often difficult to measure or quantify. While the value of a tangible product can be easily assessed through its quality, durability, or features, evaluating a service depends on less concrete factors such as reliability, responsiveness, and expertise. This intangible nature makes it challenging to demonstrate the direct impact of procurement on service outcomes.

Misconceptions about procurement’s impact

Many organisations perceive procurement as a transactional or administrative task rather than a strategic function. In the service industry, this misconception is amplified by the belief that procurement’s role ends once a service provider is contracted. However, procurement significantly influences service delivery by ensuring supplier alignment with business needs, managing performance, and maintaining cost efficiency.

Lack of visibility into procurement’s contribution

Procurement’s role in generating value often goes unnoticed because its contributions—such as cost savings, improved vendor relationships, or risk mitigation—are not immediately visible. Unlike manufacturing or retail, where procurement savings are evident in material costs, the benefits of procurement in services are often embedded in operational improvements, enhanced customer satisfaction, or reduced risks.

Outdated systems and processes

Outdated procurement systems and processes limit the function’s ability to deliver strategic value. Manual processes, siloed data, and a lack of automation prevent procurement teams from providing insights or driving innovation. As a result, procurement may struggle to demonstrate its importance in service industries, where agility and responsiveness are paramount.

Interestingly, 83% of international businesses prioritise improving customer satisfaction and experience by focusing on customer service. However, they often overlook how strategic procurement can support this goal. For instance, by selecting high-quality service providers, negotiating flexible contracts, and fostering innovation, procurement can directly contribute to better customer outcomes. The alignment of procurement with customer experience goals can unlock significant value but remains underutilised in many organisations.

Procurement in the service industry deserves greater recognition for its strategic contributions. By addressing misconceptions, increasing visibility, and adopting modern tools and processes, organisations can empower procurement to play a more impactful role. This shift not only enhances service delivery but also aligns procurement more closely with broader business objectives, including customer satisfaction and long-term growth.

The undervalued contribution of procurement

Procurement, particularly in service-focused industries, often operates behind the scenes, yet its potential to drive significant value cannot be overstated. Beyond its traditional role of cost management, strategic procurement serves as a cornerstone for efficiency, risk management, and innovation.

Strategic procurement is about more than sourcing and contract negotiation—it is about aligning procurement practices with business goals to optimise resources and enhance overall operational efficiency. By standardising processes, leveraging technology, and implementing data-driven decision-making, procurement can achieve:

• Operational streamlining: Eliminating redundancies and ensuring that resources are directed toward high-impact activities.
• Cost optimisation: Achieving cost-effectiveness not by selecting the lowest bidder, but by balancing price, quality, and long-term value.
• Performance monitoring: Establishing clear metrics to ensure service providers consistently meet business expectations.

Procurement’s contributions extend far beyond reducing costs. Key areas where procurement creates value include:

• Supplier relationship management: Building strong relationships with suppliers fosters collaboration, trust, and mutual growth. For instance, procurement teams can partner with IT service providers to develop custom solutions tailored to the organisation’s needs.
• Risk mitigation: By proactively assessing supplier reliability, compliance standards, and geopolitical risks, procurement reduces potential disruptions. A hospitality company, for instance, might use procurement to secure reliable service providers for emergency maintenance, ensuring uninterrupted operations during peak seasons.
• Innovation: Procurement can drive innovation by partnering with suppliers who bring new ideas and technologies. For example, in the energy sector, strategic procurement might engage vendors offering cutting-edge sustainable solutions, that align with the company’s environmental goals.

Procurement’s impact is often undervalued, but when strategically managed, it drives far-reaching benefits beyond cost savings. By managing supplier relationships, mitigating risks, and fostering innovation, procurement becomes a transformative force in the service industry. Organisations that prioritise and modernise their procurement functions unlock efficiencies and strategic advantages, paving the way for sustained growth and enhanced customer satisfaction.

What are the challenges faced by procurement teams in the service industry? 

Procurement teams in the service industry encounter unique challenges that stem from the intangible nature of services, dynamic market conditions, and the need for strategic alignment. These hurdles can affect their ability to deliver value, but addressing them head-on can unlock significant opportunities for growth and efficiency.

Balancing quality, cost, and supplier relationships

In the service industry, procurement teams must strike a delicate balance between three often competing priorities:

1. Quality: Ensuring service providers meet required standards is critical, as poor service delivery can directly impact customer satisfaction and business outcomes. Unlike tangible goods, evaluating and assuring service quality is complex and requires robust performance monitoring systems.
2. Cost: Achieving cost efficiency without compromising quality can be challenging, especially in sectors like healthcare or IT, where the stakes are high.
3. Supplier relationships: Building and maintaining strong relationships with service providers is essential for collaboration and long-term success. However, fostering trust while negotiating favourable terms can create tension.

Navigating rapidly changing market dynamics and supply chain disruptions

The service industry operates in a landscape of constant change, where procurement teams must adapt to:

1. Economic volatility: Inflation, currency fluctuations, and changing labour costs can disrupt existing contracts and budgets.
2. Technological advancements: The rapid evolution of technology demands agility in sourcing cutting-edge IT solutions or digital services.
3. Supply chain disruptions: Geopolitical tensions, pandemics, or natural disasters can impact the availability or reliability of service providers.

Struggle for recognition and alignment with strategic business goals

Despite their strategic importance, procurement teams often face a lack of recognition within organisations. Key issues include:

1. Perception as a back-office function: Procurement is often viewed as a transactional role focused solely on cost-cutting, rather than a strategic partner driving value.
2. Misalignment with business goals: Procurement teams may struggle to align their efforts with broader organisational objectives, such as enhancing customer experience or achieving sustainability targets.
3. Limited influence: Without a seat at the decision-making table, procurement’s contributions to risk mitigation, innovation, and efficiency may go unnoticed.

Procurement teams in the service industry face a complex set of challenges, from managing quality and cost to navigating disruptions and gaining recognition as a strategic function. Overcoming these hurdles requires investment in modern procurement tools, a focus on strategic alignment, and a shift in perception within organisations. By addressing these challenges, procurement can become a powerful driver of value, innovation, and resilience in the service industry.

What trends will procurement in the service industry follow? 

The procurement landscape is constantly evolving, and service-focused businesses are at the forefront of adopting innovative practices to enhance value, resilience, and strategic impact. Emerging trends and shifts in priorities are transforming procurement from a transactional role to a pivotal function that drives business success.

Emerging trends in procurement

• Digital transformation: The adoption of advanced technologies, such as AI, machine learning, and data analytics, is revolutionising procurement processes. These tools enable predictive insights, automate routine tasks, and improve supplier selection and contract management, making procurement more agile and efficient.
• Sustainability: Businesses are increasingly prioritising sustainable procurement by engaging suppliers that align with their environmental and social governance (ESG) goals. This includes sourcing renewable energy, reducing carbon footprints, and ensuring ethical labour practices within the supply chain.
• Diversity in procurement: Organisations are focusing on supplier diversity by engaging small and minority-owned businesses. This trend not only fosters inclusivity but also opens avenues for innovation and enhances community impact.

Risk management technologies for better decision-making

With 57% of businesses reporting improved decision-making from risk management and mitigation technologies, the role of procurement in identifying and addressing risks has become critical. These technologies allow procurement teams to:

• Monitor supplier performance: Use real-time data to track compliance and service quality.
• Predict disruptions: Leverage predictive analytics to identify potential supply chain risks.
• Enhance resilience: Develop contingency plans and diversify supplier bases to mitigate risks effectively.

Focus on supplier collaboration and innovation

Collaboration with suppliers is becoming a cornerstone of modern procurement. Businesses are moving beyond traditional buyer-supplier relationships to co-create value and drive innovation. Key areas of focus include:

• Joint problem-solving: Working closely with service providers to address operational challenges and improve efficiency.
• Innovation partnerships: Engaging suppliers to develop cutting-edge solutions, such as integrating AI-driven tools in IT services.
• Long-term alliances: Building trust-based relationships to foster mutual growth and adaptability to market changes.

Repositioning procurement as a strategic function

To fully harness its potential, organisations need to reposition procurement from a back-office role to a strategic business function. Steps to achieve this include:

• Investing in skills and technology: Equip procurement teams with modern tools and training to enhance their strategic capabilities.
• Aligning with organisational goals: Integrate procurement into broader business strategies, such as customer satisfaction, sustainability, or innovation objectives.
• Promoting visibility and influence: Ensure procurement has a seat at the decision-making table by showcasing its impact on cost savings, risk mitigation, and value creation.

The future of procurement in the service industry is shaped by digital innovation, a commitment to sustainability, and a shift towards collaborative supplier relationships. As businesses recognise procurement’s potential to drive strategic outcomes, it will increasingly be seen as a critical enabler of efficiency, resilience, and competitive advantage. By embracing these emerging trends, organisations can unlock procurement’s full value, ensuring they remain agile and successful in a rapidly changing world.

Drive efficiency in procurement with Kronos Group 

At Kronos Group, we specialise in procurement consulting that empowers businesses to optimise processes, reduce costs, and unlock value. Our tailored strategies and expertise help organisations streamline procurement operations, build strong supplier relationships, and embrace digital transformation. By aligning procurement with your strategic goals, we enable better decision-making, enhanced efficiency, and sustainable growth

FAQs