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Redefining procurement series: Procurement outsourcing (part 5) – inhibitors and benefits

Chris Gayner
Dec 20, 2011 10:37:00 AM

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chris-gayner

As we approach the end of another year, so too we approach the end of our Redefining Procurement Series. In this post, our final post for 2011, we will look at the potential inhibitors and ultimate benefits of looking externally for procurement support.

NB: This series has covered a wide variety of topics - drawing inspiration from discussions and conversations with some of the professions leading voices. I would like to thank all those who have taken the time to contribute plus everyone who has followed the series as it has developed throughout the year. I hope to kick off a new series in 2012, so don'’t be surprised if I drop you an email or call requesting an interview. Again thank you for your support and have a very happy, safe festive season.

Warm wishes
Chris Gayner

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The headline benefit of better managed procurement for any business, large or small, is the ability to increase profits - save £1m, profits increase by £1m. However, purely focusing on savings year-on-year incurs the wrath of the law of diminishing returns. With each negotiation the savings numbers get smaller and smaller as suppliers and providers defend their own margins.

As procurement teams mature in their capabilities, they realise that focusing inwardly on the business, and more specifically on the behaviours of the budget holders and stakeholders, is the key to unlock substantial improvements - and because the business is always changing, there are always improvements to be made which procurement can and should drive.

The traditional skills, processes and technology found within many in-house procurement teams - wrapped around category management, contract management and negotiation are no longer enough to satisfy senior executives and business unit heads, who are now looking for more value-adding, transformational capabilities from their procurement partners - encompassing change management, commercial awareness and innovation.

The intent to become more strategic and work closer with the business is there, however the application is often hindered due to being overwhelmed by day-to-day activities. As such, the capabilities of in-house teams often do not progress in line with what the business is demanding and the function remains static or worse, stagnates. In addition to this, the very diverse requirements needed to effectively manage costs across the multitude of spend categories is simply not achievable in-house.

One option for overcoming this situation, as mentioned in Part 3 of this series, is to look to third party providers for help.

Not your typical type of outsourcing

Procurement Outsourcing is often associated with a traditional F&A, HR, IT BPO operation (which is about shifting non-core operations to a low cost [usually offshore] location to run existing processes more cheaper and more efficiently). In contrast, Procurement Outsourcing is about enabling the procurement operation to become more effective by leveraging the skills, knowledge, technology, processes and cross industry/client perspectives from a third party provider. It’s about doing something much better and achieving a return on investment of up to 20 times. For those that have adopted Procurement Outsourcing, it'’s delivering benefits way above their expectations.

Within indirect procurement, there are hundreds of categories (each requiring specialists working in the market every day to stay up-to-date) and there is risk built into every transaction (supply chain risk, reputational risk). On top of these, each business unit potentially requires an individual solution to their unique needs and requirements (impacting economies of scale) in which procurement must truly understand and challenge where applicable.

The following table explains the true benefits for procurement outsourcing from a senior executive perspective:

Factor

Benefit

Greater expertise, value  and the ability to flex alongside business demand

Outsourcers are able to flex head count up and down to match peaks and troughs in business demand - ensuring a specialist is always covering the required category (not a generalist).  Knowledge capture and management is built into the very core of an outsourcers’ operations - ensuring they are up-to-date with the latest thinking.

The total value delivered is multiples of what is achievable in-house thanks to leveraging a service provider’'s deep expertise across all categories, leadership and influencing skills, experience, cross-sector perspective, constantly up to date market knowledge, investment in technology, innovation, and know how.

The speed to which this value is achieved is also fast - outsourcers can usually hit the ground with pre-established processes, technology and people - enabling them to focus on the low hanging fruit first while working towards the more strategic objectives.

Large outsourcers have the capability (either through near or offshore delivery centres) to absorb a lot of the admin or tactical day-to-day operations, leaving the organisation to focus on the strategic, high level aspects of the various projects.

Level of service, compliance and regulatory governance

Customer service/ stakeholder management is top priority for third party providers thus service levels are always high - often going above and beyond the call of duty.

Strict compliance and governance are the cogs inside the service and stakeholder management engine. These two facets offer guides for all stakeholders (in the form of standardized policies and procedures) to ensure there is consistency across the board - which means risk is reduced or mitigated in the majority of purchase interactions.

Innovation and best practice

Constant innovation (whether it is process, technology or trends) is core to a provider’'s competitive advantage and in their best interest to share and develop these innovations with their clients.

Level of security and trust

Long term agreements ensure that both parties are aligned - coupled with strict contracts and concern over brand reputation ensures that security is impeccable and trust is established quickly.

Spend visibility and control

Invariably, effective procurement outsourcing provides the CFO with far greater visibility over the activity and control over the business - such that more effective cost management is possible.

Cost models – influencing behaviour

Procurement Outsourcing is often based on a tiered management fee plus performance bonus based on the value delivered by procurement. This ensures compensation is directly aligned to objectives, and both parties are working towards the same goal.

Long term, strategic business outlook

The third party provider becomes a proactive strategic support function focusing on the long term - always looking at the business' strategic issues while effectively supporting/delivering the day-today operations. This enables procurement leaders to focus on the high-level thinking that will help drive the business forward and not get caught up in the tactical '‘noise'’.

 

Overall, organisations are able to realise significant benefits by turning Procurement'’s attention from generally focusing outwards on the supply base to also focusing inwardly on the organisation by challenging stakeholders, functional managers, business rules, ways of working, policies and procedures, etc.  It'’s by changing the behaviours of people within the organisation itself that can release untapped rewards. 

And let'’s be clear, we’re talking about tens of millions of pounds, Euros or dollars. Benefits remain untapped in most organisations because businesses don’t have the necessary skills internally, and at the C-suite level, indirect procurement'’s importance is often perceived as low. 

Our own experience, for example recently with a FTSE 100 organisation, has shown that better managed indirects can deliver significant profit improvements - with over £40m of in-year savings (which went straight to the bottom line) achieved in 2011, in addition to greatly reduced levels of risk, and a cultural shift in attitudes towards third party expenditure.  This is exactly why the C-suite is taking a greater interest in what procurement can achieve.

The fact is, for most organisations it is simply too expensive to have in-house the sheer volume of people needed to cover the breadth of indirect categories, to the sufficient levels of depth of current knowledge, plus the leadership, change management, and communication skills, and of course the appropriate procurement technologies.

‘'Intimacy'’ - The Missing Piece of the Puzzle

The final piece to this puzzle is what we refer to as the '‘client or customer intimate'’ approach - that is truly understanding the drivers, needs and expectations of the entire business. This critical piece of the puzzle is simply missing in many in-house procurement operations (and to a degree many traditional BPO providers). The ability to get under the customer'’s skin to truly understand what makes them tick, and what the real problem is, takes a lot of human, cash and time resources to get right, but can be the difference between a perception of low value and one of a strategic business partner.

Partnering with a third party provider who applies an '‘intimate'’ approach can be the key to unlocking the door that stands between procurement and the board room.

Proxima Group

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