Who Will Source The Sourcer?

Today’s
guest blog on procurement outsourcing comes from Bill Huber, Director, TPI.

Billhuber
Procurement
outsourcing is positioned to drive some of the most dramatic bottom-line
benefits to corporations. Yet of all forms of sourcing, it is broadly
misunderstood by both procurement and outsourcing practitioners and has
achieved a slow rate of adoption.

Recent
research by the Aberdeen Group (sponsored by TPI), Procurement Outsourcing: A Strategic Imperative,
showed the top four reasons for not
outsourcing procurement:

  • Procurement a core competency: 44 percent
  • Prior investment in procurement applications: 43 percent
  • Unclear benefits/value of outsourcing: 38 percent
  • Perceived loss of control: 29 percent

As
a former Chief Procurement Officer (CPO) for a very large company, these four
reasons have aligned with my thinking at various times in my career.

Originally,
I was committed to the following premise: a company’s ability to transact
efficiently and effectively is absolutely a core competency which
differentiates the agile from the maladaptive. So, if my company were to
outsource procurement, wouldn’t we be giving up this competency? Who will
source the sourcer?

After
continuing to sty the trend and speaking with very intelligent peers at other
companies, I came to three realizations.

The
first: Developing strategic relationships, determining contract and
decision-making standards, and establishing a risk management and governance
framework are all strategic activities. Managing transaction processing is not.
The sourcing of desktop computers, office supplies or airport transportation is
commodity focused and stimulates operational efficiency and cost-savings only.
The bottom line: Best practice procurement is about understanding strategy and
acting accordingly.

The
second: With prior investment in procurement applications, it is normal to
migrate application investments to a third-party outsourcing provider. It is a
matter of a business case. But procurement managers tend to be very
conservative regarding spending and maximizing investment value. An occasional
write-off and migration to a model with a better business case is without a doubt
the role of a good manager.

The
third: Unclear benefits and loss of control are a function of education and
analysis. A well-structured outsourcing transaction will always have a clear
business case and structure. The issue is that companies do not have
sufficient resources to focus on sourcing strategy and execution, risking the
loss of control throughout the life of an engagement.

Many
outsourcing experts do not understand procurement and see its efficiency play
around transaction costs, similar to finance and accounting. At most companies
the potential cost savings from a pure transaction efficiency perspective is
comparatively unexciting. This is why procurement outsourcing needs to be
considered holistically.

The
benefits of procurement outsourcing come through long-term business
relationships, not via transactional burdens associated with a purchase. What
drives millions to the bottom line is mature transaction efficiency, market
intelligence, category sourcing and higher spend compliance. Procurement
Knowledge Process Outsourcing (KPO) is one example, enabling companies to
perform market and risk analytics quickly and cost effectively, supporting the
strategic capabilities of the agile CPO.

Avoiding
outsourcing can become an impediment to achieving set objectives, both from a
cost and a change management perspective. Had I come to this realization
earlier on, I would have been left with a larger chunk of my budget for more
strategic-minded talent. But looking ahead, the future for procurement depends
on the use of strategic outsourcing to its advantage.

From
your perspective, what do you see as the future for procurement? How can
companies use strategic outsourcing to their advantage?

 

0
  • http://www.iaccm.com Tim Cummins

    Bill,
    I strongly support your observations and would add the following:
    1. As you correctly observe, the focus on transactional savings is a diversion from the real ‘pots of gold’ and also prevents having the investment dollars to attract and pay the highly talented resources that could truly make procurement strategic.
    2. While you allude to this point, it is clear that today’s functional leadership is often the constraint. There is no real evidence that most are ready to think outside the box and to transform their function’s role and value. Maybe it is age, maybe it is vision, maybe it is fear, maybe it is being stuck in conventional perceptions of power and authority …. what ever the reason, too many of today’s CPOs are not serving their staff or their company especially well. That is why a) dissatisfaction with functional leadership is #2 in the ‘things I dislike about my job’ (IACCM 2007 talent survey; and 2) for all the huffing and puffing, Procurement is still not generally seen as a key strategic player – there is a gap between wishful thinking and reality.
    In my experience, the best way to be viewed as strategic is to try to eliminate your job; it leads you to all sorts of unexpected values. And what better way to start that eleimination than to outsource – either literally, or by empowering those who you have for years frustrated with your controls!

  • bill.huber@tpi.net

    Tim,
    I could not agree more. The first step, it seems, will be more education on this topic within the procurement community.

  • http://www.credit-suisse.com Thomas Larkin

    Bill;
    Before commenting on Tim’s reply, let me address one of your points made in your observations.
    1) You wrote, “With prior investment in procurement applications, it is normal to migrate application investments to a third-party outsourcing provider.” This is a key item that gets over-looked in a lot of BPO activities in that most organizations don’t understand what it is that they are outsourcing. Yes, there is inherent fear on the part of managers. Yes, there is a focus on the transactional and not holistic areas. And yes, the long-term aspects of an outsourcing relationship are the only way to see exceptional ROI’s. But without understanding the entire holistic picture, most companies will fail to find ANY value in outsourcing because they don’t understand their own inherent costs due either to process inefficiencies or over-engineered solutions to solve non-complex problems (the rocket ship to cross the street scenario).
    —> One possible solution is to address this fear and ROI picture by truly digging through the muck and mire of the Sourcing / Procurement organizations. Without an end-to-end picture of the Source, Procure and Pay aspects you cannot accurately identify the Key Performance Indicators of a successful outsource relationship. Once the holistic picture is drawn and the key requirements identified can an organization hope to find the truly strategic elements that present a core advantage in the marketplace vs. the transactional or commodity focused aspects that would benefit from bundled activity in an outsourced environment.
    2) Now as Tim shows within his reply, a 21st Century viewpoint is needed, but is in short supply within the industry. I have spent the last 22 years of my career always looking for ways to eliminate my role. Better automation, economies of scale, improved processes, leverage other best practices, etc… allow me to find ways to operate outside of the transactional and mundane in order to focus on the truly strategic elements of Supply Chain Management. Understanding the entire end-to-end solution (the Cow to Happy Meal value chain, so to speak) allows me the ability to focus on the truly strategic elements and eliminate the generic. But unfortunately, there are few individuals that share this view because the education of the holistic value chain is always bogged down with the thinking of “we are unique in our industry.”
    —> I have consulted with over 20 organizations on Supply Chain, Sourcing and Procurement theory. I have found that the more things change, the more they truly stay the same. There are elements of unique strategic issues within each company, but there are also 60-70% of Sourcing and Procurement that can be bundled and outsourced without disturbing the competitive advantage of the company. I look to TPI and IACCM to start an education program for top CFO’s and Executives to start to understand this business driver. Without Senior Management getting bought in, then no one will source the sourcers.
    Tom

  • John Fafian

    I think your first point regarding the difference between the strategic, retained, pieces and transactional, outsourcable, pieces is spot on. One of the challenges is that the line between these strategic and transactional is different for different organizations, and may be impacted by things beyond the normal procurement process. For example other customer/client relationships or strategic alliances may impact whether one is comfortable outsourcing a particular commodity. It is these nuances that require one to not only have a solid understanding of outsourcing in building a strategy, but also an understanding of one’s company’s business to include these other influences on the strategy. In addition, it is vital that stakeholders from these other areas be managed as part of the sourcing process.

  • Dominick Grillas

    Bill,
    Very good points you raised, to which I would like to add a few of my own observations as a provider.
    These past years many discussions and initiatives comprised a stated, sometimes implicit reference to a refreshed view of a company’s true core competencies.
    Breaking from the mega-centralization trends of the 80’s, we have been seeing more and more companies going through an emotionally charged corporate “soul searching”, building the concentric circles of what is Core, non-Core-but-critical and everything else.
    Economic pressures have caused many companies scramble to grow, let alone keep their existing revenue lines in a shrinking market.
    We are asking a functional leader or executive to reach out to peers, executives and others, convince them to embrace a broad change on a new strategic direction and all of the above at a time where all eyes are on the operational performance dashboard and the reduction of risks.
    In an economic downturn (we had a few examples from the past to learn from), a prime focus is to weather the tough times (maintaining customer base) without failing; another one is to be ready to take on market share and business as soon as the demand rebounds.
    Responding to emerging trends, customer needs and being able to de-focus / re-focus on market segments and movements with no delay means taking a leadership position while competitors might still be struggling to emerge for the crisis or unable to sustain the pace of the new growth.
    An outsourcing strategy that keeps and nurture true core competencies and collaborate actively with a service partner to increase agility and nimbleness is a very good first step in this direction.
    Allowing the internal strategic thinking to proceed – without non-critical operational distraction, delegating to a partner to ensure that operational performance is maintained rain or shine and throwing core talent and skills at the emerging growth without being limited by size or existing capabilities make a big difference; one that could differentiate future market leaders from their followers.

  • http://www.esourcingforum.com David Bush

    Bill,
    There are a lot of great comments here, which all validate your original post. I certainly agree with this concept, as it is something we have added to our solutions and seen it work well. Specifically, we focus on something called “Sourcing Execution” which would be to your point #1 and allow sourcing teams to use their resources on strategic objectives, not wasting valuable time on armored car services or IT hardware.
    More importantly, I think the market is agreeing with your premise. We have seen a sharp increase in inbound interest for outsourcing the tactical sourcing process, both on our software as a portion of the proposal or within our client base that already has a license to eSourcing functionality.

  • Sumit Mahajan

    Bill,
    I think one of the fundamental reasons that Procurement outsourcing has not had such a big impact has also been the maturity of this service to truly support an end to end procurement solution…most models either provide sourcing excellence or procurement processing excellence. There are of course procurement platforms available but at the end of the day, capturing the savings while ensuring smooth regular supplies remains the CPO’s responsibility. I think the next step in procurement solutions is to better control, monitor and integrate the supply-side risk to have a more comprehensive/convincing bottom line impact discussion with the client. Once this service reaches this level of maturity, it promotes clear significant value.
    So while there is a question of clients not being able to let go, it is also for providers to equip themselves to take on more.

  • http://profile.typepad.com/6p0115709bc30d970c Hack Heyward

    Bill:
    Dominick Grillas makes some excellent points about structuring the procurement capability of an enterprise so that as demand rebounds, there is enough agility to focus quickly on those individual market segments where demand surges. Outsourcing selected sourcing and procurement functions, of course, is a well-understood way to gain variable capacity.
    For the CPO whose procurement functions are performed primarily in-house, the lack of variable capacity is compounded by two phenomena common in a downturn that also constrain his or her ability to add value quickly: First, the larger the enterprise and the more cost pressure it’s under, the more likely that staff headcount will be arbitrarily capped or cut. And second, the less responsive the CPO’s organization appears to the budget owners, the more likely the budget owners will be to do the truly strategic aspects of the work by themselves, for better or for worse.
    Having worked with clients in the “before” procurement outsourcing as well as the “after”, and also having lived both as a procurement process owner, I would submit that staff headcount caps almost always mean that precious resources are wasted on low-value-add activities simply because they have to be done and procurement is the organization that does them. Activities like transactions, low-dollar spot buying, and some of the category sourcing mentioned above need to be planned and governed by the CPO’s direct staff; but to be forced to waste limited resources on these, when they could be outsourced at low risk, is to miss the real opportunity to transform the procurement organization into one that truly adds strategic value to the enterprise.
    The tragedy is that procurement’s internal customers, the budget owners (line management), know perfectly well what the strategic value add of the procurement function looks like—that’s why they do it themselves if procurement is too busy turning reqs. into POs. Or they do it themselves if procurement shows up for the big game with the B-team who wants to talk about who controls the process rather than how to get the best partners to add the most value to the enterprise.
    The CPO who has carefully designed the “after” procurement organization to add this strategic value before delegating the low-value add work to a service provider, on the other hand, is the CPO who will control a scalable, flexible and cost effective procurement work force; who will be positioned to quickly support specific market segments when demand surges; and who will become indispensable to the budget owners.
    –Hack

  • Cynthia Batty

    My view of this problem is that it is more pervasive than just a reluctance or stodginess of the CPO. It is clear that there are many visionary people in these C-level backoffice roles who cannot move their ideas forward because they are not at the Board table, part of the strategic decision making of the company. I believe, therefore, that the Executive Board is as much at fault – and in companies that can’t make the changes, they are the bearers of the full responsibility. Corporate leaders that see their organizations as split between “what they do” and “how they do it”, and who do not put the same focus on developing operational excellence in their back office areas, give permission to back office executives to remain complacent – or frustrate them into inaction. In either case, it comes from the top.
    Business operations is a poor second cousin in many companies; it is seen as that awful and boring stuff that is done in the back office, where it belongs (in the dark and behind several doors). This is the primary impediment to what I call the Sourcing Enabled Organization – a company in which Business Operations (Procurement, IT, HR, Travel, etc.) is an equal partner with product development, marketing, sales and strategy at the senior executive level. There might be a Chief Operations Officer, but generally that role is not on equal footing – it’s just sweeping up after the elephant. Or the Executive allows the roles below or beside the COO are allowed to squabble among themselves and go off in whatever direction they think is right for their particular area – completely leaving corporate strategy behind.
    Corporate-level neglect of Business Operations management (and failure to tie Business Operations to the strategic vision of the company’s “core competency”) means that important savings opportunities of many kinds are completely missed. In my experience there is a lot of money to be saved in Business Operations – and every dollar saved in this way goes straight to the EBITDA line, without needing to sell an additional item. I am always surprised that this is not top of mind, but it’s not glamorous – it’s genuine hard work.
    The Sourcing Enabled Organization doesn’t have to outsource everything, far from it. But it is an organization where the most senior roles in the company are attuned to the back office and its many opportunities to add value and carve cost off the bottom line. I’ve looked specifically at the role of the CPO and procurement organization in this regard – it has been my experience that Procurement organizations often work against the objectives of the Sourcing Enabled Organization without realizing it, because they are applying old paradigms to the problem of sourcing in general – points made by all the commentators above.
    I’ve heard Tim Cummins’ visionary insight to what the Procurement organization of the future is, and it’s truly inspirational. In the Sourcing Enabled Organization, Procurement is a critical success factor. Today Procurement is generally seen by the organization as a gate, but in this vision Procurement is an enabler of change, of savings, of new ways of doing business. That’s a role that belongs at the top, with equal power and equal responsibility to the rest of the core competencies of the company.

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