guest blog on procurement outsourcing comes from Bill Huber, Director, TPI.
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.
research by the Aberdeen Group (sponsored by TPI), Procurement Outsourcing: A Strategic Imperative,
showed the top four reasons for not
- 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
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.
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?
continuing to sty the trend and speaking with very intelligent peers at other
companies, I came to three realizations.
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
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.
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.
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
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.
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.
your perspective, what do you see as the future for procurement? How can
companies use strategic outsourcing to their advantage?