Outsourcing is NOT offshoring – why procurement outsourcing needs an alternative approach
Nov 13, 2013 7:42:00 AM
The procurement brand has suffered greatly over recent times, at a time when the business need for it has grown. A history of under-performance, detachment from the real business needs and an unhealthy obsession with savings have all contributed to a widespread reputational problem, that ultimately undermines the credibility of the function.
Unfortunately many internal functions are struggling to regain this lost credibility, because a relatively small fixed team can only do so much. The vast array of non-core costs, which touch hundreds of stakeholders right across the business, require such a broad range of skillsets to manage effectively, at the same time as demanding deep functional expertise, that it is overwhelming for an in-house team to excel.
Businesses however, are looking for more from their procurement teams – and as research shows, they are now looking externally for the answer. Everest’s latest research, into Outsourcing trends, is but one of many that shows a steady rise in the propensity to outsource - with procurement BPO being among one of the fastest growing areas of outsourcing (The PO market grew at 10 percent in 2012, reaching US$220 billion in terms of managed spend). And although the procurement function lags behind F&A and IT when it comes to outsourcing contracts, there has been a steady growth in BPO companies offering procurement. But are they doing it properly?
We recently conducted an interview with Stephen Day, Group Supply Chain Director at Vodafone, who explained how in his experience, the traditional detached BPO function can still cause a headache for the business that it serves if it is not properly aligned from the start, especially in the area of procurement outsourcing. Day commented that “businesses [employ] these vendor management organizations that are completely misaligned with the core sourcing team.”
But why are these BPO functions so poorly aligned?
Traditionally outsourcing begins from a labour arbitrage and IT perspective. ‘What can we offshore? What processes can we outsource? What functions can we automate?’ These questions are often the first to be addressed and can provide quick wins and savings. Therefore, when it comes to procurement, a similar model is often adopted. But for procurement, this doesn’t work. Many of the offshore BPO providers have attempted to get into the procurement space, but have failed – because the ‘traditional’ approach to offshoring, using technology and streamlining processes, is completely missing the point of what successful procurement is all about.
Day commented further, saying that “people can be more inventive in terms of thinking about how to fix a problem. They should not gravitate between a very digital yes or no, but rather look at areas and opportunities to solve a problem that is cost challenging to their organisation”.
This is evident when looking at, what is for many, the primary metric of procurement’s performance: savings. Constantly focusing on savings limits the demand for a smarter sourcing solution – particularly from stakeholders who are value-oriented (as any CMO will tell you) rather than purely cost-oriented. It also destabilises the relationships you have with your suppliers. After all, a strong and reliable relationship with a supplier cannot be achieved with a supplier that feels bullied into providing their service at a lower cost year on year
Savings alone cannot be the only measure of success for the procurement function. A business does not spend money to save it. It spends money to achieve a goal – and should aim to do so in a way that maximises value. So how procurement’s performance is measured needs to be built around that. The starting point should be ‘how is this cost contributing to the achievement of our corporate goals?’
There should be a focus on areas such as innovation, risk management, stakeholder satisfaction, and so on. What is the capability of the procurement team? How does it need to be improved? What’s the journey it needs to go on, and how can we measure whether we’re achieving that.?
There needs to be a different approach to successfully manage the procurement function. Whether internal or external.
A level of control and intimacy needs to be retained between client and outsourcer. But moreover, there needs to be a bigger picture view of the service that procurement delivers back to the business. Day agrees, stating that “over time, a mistake people make on the outsourcing contract – they forget that they need to retain some kind of investment to manage the on-going contract. I think the decision about how you want to run the model post transformation is as important as deciding what it is you want to outsource”
However, Day suggests that when properly managed, procurement outsourcing is a feasible alternative to in-house functions and provides advantages in the form of category expertise and industry knowledge “when outsourcing is done well, it’s a very powerful business transformation opportunity. Because there are areas of your business that are not your core expertise and there are companies out there who might be able to do a better job.”
Offshoring is NOT outsourcing
Procurement outsourcing is a broad term, and what providers offer varies greatly – knowing what you want to achieve and which providers are best for that is key. Outsourcing to achieve labour arbitrage benefits in procurement, I would argue, is not procurement outsourcing at all – you’re really talking simply about an extension of an F&A BPO. To do this – the offshore ‘multi-tower’ BPO houses are what’s needed.
Achieving greatness and maximising the value from your third party cost base is different. It often needs up-skilling what you have today – not down-skilling. It needs intimacy with stakeholders – not off-shoring. It needs focus on procurement, deep expertise, access to knowledge, frequency in the 100s of markets that a company spends its money on, access to a very broad range of skillsets, and so on.
The old adage advising to not outsource until you have it all sorted in-house doesn’t stack up in the world of procurement. One of the main attractions of procurement outsourcing is that you are able to achieve something you can’t with a relatively small in-house team. You outsource to get a better result.
The key is to have a very clear picture of what is being outsourced, and why. The trick then is to find a provider that is capable of moulding around YOUR diverse needs, not one that tells you how you should change to fit their pre-built/ pre-determined mould.