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Procurement outsourcing - powering business improvement

Posted by Guy Strafford on Wed, Mar 07, 2012 @ 03:58 AM
  
  
  
  
  
Guy Strafford - Proxima

The rebranding process we have recently gone through has given us amazing insight into the relationships we enjoy with our clients, and I'm very thankful for everyone's support and well wishes during the change. It has also enabled us to reflect on what our clients and the wider business community want and need from a procurement outsourcing partner.

One point that came up several times during the process was why procurement outsourcing is underutilised and underappreciated by many senior executives. Firstly, it seems that procurement outsourcing is often confused with 'traditional' business process outsourcing (BPO) with its 'lift and shift' to a low cost, offshore location approach, resulting in the same processes being run cheaper. The reality is that successful procurement outsourcing is altogether different – it's all about driving value by doing something fundamentally much, much better than before. Phil Fersht, Founder of Horses for Sources noted in a recent blog "While the rest of the outsourcing industry deals with FTE-based lift and shift, procurement executives are really interested in gaining expertise".

Secondly, the majority of past procurement outsourcing agreements have focused heavily on savings as the key metric and measure of success. As such, providers have been focused on cost reduction year after year to ensure savings targets were met. At around year three, the contract begins to fall apart as the law of diminishing returns sets in and the savings become harder to achieve. Furthermore, many senior executives have become frustrated with a large portion of reported savings failing to materialise on the bottom line. This misalignment between what the business receives and what the provider delivers means that many procurement outsourcing contracts are agreed upon with short sighted objectives, inhibiting the provider from acting as a true business partner.

Ultimately, senior executives are looking for a strategic partner to bring change, enhance management control, transform buying behaviour and deliver sustained improvements to profitability. As the procurement outsourcing market matures (Horses for Sources research predicting growth rates >15% pa over the next three years), procurement outsourcing providers are becoming more and more capable of ticking all the boxes on senior executives wish list – you just have to know which one to pick!

NOTE: This was taken from our March 2012 e-newsletter - click here to view the complete e-newsletter

 

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Comments

Procurement outsourcing can potentially offer immense value. I had personally helped source for a contractor in a Low-cost country that delivered $10 million in savings over five years.  
 
However, some senior executives may have some interest in preserving some semblance of in-house manufacturing. Herein lies the conflict between providing the best value and savings vs. in-house capability. 
 
Posted @ Friday, March 30, 2012 3:08 AM by Harold Fong
I would agree with Harold comments but I think it goes much deeper because it’s about how you develop trust with your client and continually exceed his expectations to show that you will not just provide short term gain but will be there to provide long term strategy and deliver that strategy so the client will not need to be protective of his in-house team but this is long journey and requires high performance from your teams. 
 
Posted @ Friday, March 30, 2012 3:09 AM by Michael Matic
I think partially, it has to do with finance. If they are not on board or support purchasing, cost savings and value are underappreciated by all executives.
Posted @ Friday, March 30, 2012 3:10 AM by Kimberly Butts
Tend to agree - quite often the systems with some companies that Procurement has to use can be Finance focused as the importance of Procurement has been 'over looked' then Procurement is playing catch up to implement Procurement focused tools - this can often be obvious with the Procurement reports available which when run it can be so obvious the systems were set up with Finance in mind rather than Procurement - however all is not lost and can be turned around with good management to incorporate Procurement needs also 
 
Posted @ Friday, March 30, 2012 3:11 AM by Tim Smith
Procurement outsourcing can be appreciated by senior brass as long as the goals of the outsourcing project are communicated up front, a scorecard is communicated frequently on wins, and new goals are re-established to breathe life into the outsourcing venture. Most of the success will come through communication of the wins to the right senior audience.
Posted @ Friday, March 30, 2012 3:13 AM by Bryan Eaves
Procurement outsourcing can often include Finance - i.e. the whole P2P so yes - some one of the keys to success are clean accurate data and buy in throughout the organization from the top down - sponsorship can be beneficial
Posted @ Friday, March 30, 2012 3:14 AM by Tim Smith
As an accountant myself, and having spent a lot of time with CFOs, the finance community tends to focus a lot on savings and on processes. Procurement is about more than this - after all products and services are purchased for what they enable / deliver, not because they save money. This encourages broader engagement not only with the cfo, but also with the rest of the c-suite including the CEO.
Posted @ Friday, March 30, 2012 3:15 AM by Guy Strafford
Procurement outsourcing is underappreciated by many senior executives because theoretical business improvements can't be proven. Direct cost savings can be demonstrated perhaps, but I don't believe it's just about cost (unless you're an accountant). If you can ever demonstrate no loss of control, you may be half way there.
Posted @ Friday, March 30, 2012 3:18 AM by Steve Lockett
Dear Guy,  
 
 
 
This is a good question. I think those companies which have its own procurement organization prefer to keep in-house this strategical function to enabling focus and full responsibility, on the other hand, probably they do not have the full trust for an outsourced provider, what I would challenge, because the added value within this segment is clearly visible and measureable is the basis is good enough. By the smaller organisations without procurement function in-house I think the owner or the management of the companies like to manage main procurement activities on their own scaring loosing full control on the operations. 
 
 
 
Certainly this also can be easily challenged, as without having full control on all spends (not only on the major ones) high values can spread out, what an outsourced procurement organization can leverage, control, consolidate and achieve visible results.  
 
 
 
Based on my personal experiences Procurement still needs to earn its credibility, however by those companies which put efforts to establish a procurement organization within a very short period see the benefits and engaging procurement control on all areas.  
 
 
 
Taking into consideration all above, it is just a question of time and "marketing" of Procurement to prove benefits (like lower cost, better ROI, transparency and clear measurable success) not only an insourced but also outsourced procurement function.
Posted @ Friday, March 30, 2012 3:19 AM by Péter Nagy
Agree with Peter. Sometimes, we prefer to use existed vendor to reduce risk on quality, transportation and to reduce communication cost.
Posted @ Friday, March 30, 2012 3:20 AM by Nora Zhang
 
 
To follow up on this, a good way to approach outsourced procurement would be in areas where the company does not have robust internal knowledge - or areas that historically cost more than the market average. Executives tend to baulk if they are told they do not know their supply chain needs. Instead, find a couple of MRO products where an outsourcer could cut the cost. Use that as a starting point and then add more commodities/services
Posted @ Tuesday, April 03, 2012 4:12 AM by Mindy Watkins
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