The Four C’s of Implementing a Procurement Outsourcing Strategy
Last month, we introduced procurement outsourcing as one of the fastest growing areas of business process outsourcing (BPO). The article described how procurement outsourcing can serve as a catalyst for change and provide valuable benefits a company can’t produce on its own. However, “having a sound procurement outsourcing strategy is only the beginning of a successful initiative,” says Alfonso Montiel, vice president of the Procurement BPO Service Line for EDS, the global IT and BPO services provider based in Plano, Texas. “The challenge corporations face in this space is a clear understanding of what they are trying to achieve with procurement BPO. The rationale for procurement BPO goes well beyond cost savings. Companies must approach this with a portfolio view of procurement as it relates to information technology and other company initiatives.”
In Part 2 of this three-part series, we outline some practical steps to prepare your organization’s procurement outsourcing strategy.
Categories: The Outsourcing Strategy Represents the Carat Weight
A critical step in the formulation of a procurement outsourcing strategy is to segment your spend categories into core and non-core based on your business. “While most companies agree that buying office supplies is not a core activity, some may disagree on the impact of other traditionally indirect categories, such as IT or logistics. With this segmentation in mind, generate a list of categories with ease of implementation and quick wins potential as candidates for outsourcing,” the EDS executive explains.
The next step is to quantify your category spend. That includes both the dollar amount of spending in each category (what are you spending?) as well as how your company makes purchase decisions for that category (who is spending?). Depending on your corporate environment, it may make more sense to select your largest categories for a full-throttle initiative, or alternatively, select categories that have centralized control to ease into an outsourcing arrangement.
In addition to answering the quantity questions surrounding your category spend, ask “how?” How does your company purchase the items in each category? If your systems and processes supporting each of these categories are pieced together across multiple systems, procurement outsourcing offers an opportunity to consolidate these activities without the huge capital investment. Conversely, if you already have common processes and systems supporting several categories, these categories make a logical grouping for an outsourcing initiative.
Whether you decide to outsource all your indirect categories or just a handful, it is important to understand the underlying dynamics of these purchase activities to move to the next step.
Course: Bringing Clarity to the Strategy
To plot a course of action, you first must do some homework, both within your organization as well as externally. The first assignment is to take your category research a step further and create a detailed inventory of your “as-is” environment, including information on people, processes, systems, and current initiatives. The results of this effort will develop your business case for outsourcing as well as accelerate the data gathering process during the outsourcing contract negotiations.
Another helpful exercise is to consider how your company addressed innovation in the past. Look outside the procurement area. How did human resources or IT handle change? Find out if there are any ways you can plug into their efforts. You can learn from the challenges they faced.
Once you have cataloged your internal facts and figures, turn to the marketplace and perform due diligence on the various procurement outsourcing providers. Read analysts reports carefully. This knowledge provides an important perspective, as it validates that your service provider is on the correct course. As part of your research, understand the latest industry benchmarks for procurement and how your organization compares. If you don’t feel comfortable doing this research yourself, team up with a third-party advisor with experience in this field.
Consensus: Setting the Strategy in Motion
Outsourcing initiatives are rarely successful if the top executives are not supporting these initiatives 100 percent. Internal champions are crucial. The key to receiving approval from your counterparts is to demonstrate you have thought through the risks as well as the benefits and are prepared to mitigate the risks inherent in any outsourcing arrangement.
Consider the following natural objections to an outsourcing strategy. Here are some suggestions for working with your preferred service provider to address these concerns:
- Reduced control over the process: Ensure your chosen service provider has demonstrated their ability and commitment to building measurable, enforceable service level agreements with penalties for non-performance.
- Continuity of delivery: Ensure you have assembled a process team to manage compliance to the outsourcing contract. Make this a strong governance team by empowering them to take the necessary actions. Ensure you have the service provider’s commitment to being governed.
- Personnel and process transition issues: Do not sign a contract without a detailed transition plan from the service provider that outlines the key milestones of the transition as well as how it addresses the issues surrounding people and service delivery.
- Technology integration issues: Work with a service provider who has the technical competence to implement a technology solution as well as maintain the technology environment to ensure you have access to the latest proven technology tools. “The one-size-fits all platform and solution is an unrealistic expectation. The key is a modular approach to procurement technologies and functionalities linked to the key processes” Montiel indicates.
In your efforts to build internal consensus on your procurement outsourcing strategy, experience suggests putting together a cross-functional review team that includes representation from the following functions:
- Human resources: Your HR department will walk you through the sensitive issues surrounding employee transfer to the service provider and help supervise change management.
- Information Technology: The IT department will be a core resource to assist with both internal assessments and subsequent reviews of the service provider’s proposal.
- Legal: It goes without saying that a transaction of this magnitude should be reviewed in detail by your legal counsel from both the perspective of your own legal liability as well as from the viewpoint of your supply base.
- Finance: Not only will your finance department provide guidance as to the pricing model suggested by the service provider, but they can also ensure that your firm properly accounts for and measures the return on investment of the outsourcing initiative.
Change Management: Maintaining Your Investment
Once the contract is signed, change management is how buyers cultivate and maintain the relationship. Change management and a solid joint governance program form the basis for long-term program success. This important topic mandates its own article, so the final installment of this series will expand upon how to ensure a successful partnership with a procurement outsourcing provider.
Lessons from the Outsourcing Journal:
- The main steps in formulating a procurement outsourcing strategy are to study the categories of spend, determine your course, then seek consensus.
- Study how other departments have handled change and innovation. Learn from them. Can you tie into their efforts?
- You will need help from other departments to obtain agreement on a procurement outsourcing contract.
- Executive buy-in is crucial to the initiative’s success.