Redefining procurement series: Procurement outsourcing (part 1) - overview
Sep 6, 2011 8:10:00 AM
My most recent post in the Redefining Procurement Series talked about how outsourcing has risen to be a key element in how businesses operate today. I will now discuss one specific type of outsourcing - Procurement outsourcing, (also known as Procurement BPO).
Proxima recently published an article on Spend Matters which looks at procurement's journey towards becoming a strategic business partner at the heart of businesses, and the role that outsourcing can play in this journey.
When most of us hear the term 'outsourcing' we have been trained to think in terms of the traditional BPO model, where you lift low level, labour intensive, administrative tasks and shift whatever cannot be automated to an offshore location where labour is more cost effective - i.e. cheaper. This model has worked particularly well for Finance and Accounting, HR and IT due to the repetitive, low value-add tasks that could be centralised and engineered in a consistent way allowing the function to focus on its core activity with the provider absorbing the white noise.
Successful Procurement however, relies on the ability of the provider (whether internal or external) to influence company-wide behaviours through building and maintaining a deep understanding of all internal stakeholders and their changing demands alongside a thorough knowledge of the supply market. A simple lift and shift solution, whereby you get the same service as before using a streamlined and cheaper operating model, is unlikely to work for Procurement - being more efficient is not enough on its own.
Ultimately, successful Procurement Outsourcing relies on the ability of the provider to find a way to achieve far better results than the operation/function was achieving before - it's about being much more effective. It's about constantly engaging with stakeholders and changing perceptions, attitudes and behaviours while maintaining the market knowledge required to deliver a best-in-class service.
Procurement Outsourcing looks to address many of the problems that, in many cases, internal teams simply cannot address themselves due to:
- Lack of market knowledge: Internal functions, given the broad range of categories they often have to cover are not in the market frequently enough to become credible specialists in a particular area.
- Lack of stakeholder engagement: Given the broad remit of categories covered, and general 'noise' that creeps into day-to-day operations (emails, calls, administration etc) many internal functions spend too little time developing true engagement with their primary customers - stakeholders within the business.
The stakeholder engagement piece is absolutely vital when looking to drive the most value out of Procurement. However, changing stakeholders' behaviours often requires a strong value proposition up front and clear senior management buy-in to mandate the change and invest in sustaining the new behaviours.
A recent study Proxima ran in conjunction with NelsonHall (involving 120 CFOs/CPOs from Europe and North America - focusing on indirect/non-core/GNFR procurement) found that the perceived value (at the board level) that Procurement brings to the table - in relation to other functions such as Sales and Marketing, Finance, IT and HR - is relatively low.
As such, where Indirect Procurement sits on the Board and CFOs agenda means that little attention in terms of investment (time, people, money) is being placed on developing and driving maximum performance out of this element of business expenditure.
This lack of buy-in and investment, particularly into indirect procurement, means that very few in-house teams are resourced sufficiently to effectively handle the day-to-day needs of the business. Nor do they have the bandwidth to develop the strategic capabilities of the function. All of this results in a poor service delivered back to the business and the perception of an underperforming Procurement operation - and so the vicious cycle continues ...
...until a cataclysmic tremor in financial sustainability forces global organisations to take a good hard look at all cash flow pressure points - with Procurement being a major one. Senior executives are increasingly becoming intrigued to look under the proverbial procurement hood and find out what makes this old rusty machine tick - and what options there are for managing this relatively tactical function better.Proxima Group