This SIG Research Report is based on interviews and research performed during the second half of 2002, a time when outsourcing of the procurement function was being considered by an increasing number of enterprises.
“EXECUTIVE SUMMARY
By Barry Wiegler, Managing Director
Sourcing Interests Group
Companies are more actively investigating the outsourcing of procurement because of the economy: companies need quick savings. Procurement deals with 50-70 percent of many companies’ cost structure, which can be addressed quickly through outsourcing. In addition, executives have become comfortable turning over some internal functions (such as IT and HR) to outsourcing providers. They no longer need to be convinced they can save money on procurement, and they also understand the pitfalls of dramatic change and the costs of e-procurement technologies. They consider outsourcing as an alternative.
But outsourcing of the full procurement process is very rare, anywhere in the world. Companies are talking about it more than actually doing it. Yet, it could follow the lead of HR and financial outsourcing, which began with transactional outsourcing and then progressed to outsourcing combinations of functions.
Outsourcing is worth considering under several other circumstances:
• When your procurement infrastructure is in disrepair
• When you lack procurement skills
• When you face a serious scale disadvantage to your competitors
• When you undergo a merger or divestiture
• When procurement is so low a priority at your firm that you cannot gain access to procurement technologies.
But realize that procurement is highly connected to other company processes, so it may be difficult to extract. Furthermore, it can force business units to break bonds with their favorite local suppliers, which can cause significant internal disruption and raise political issues. Even if the economics are right for outsourcing procurement, the culture may not be.
Be wary of outsourcing procurement if it is too disruptive, if it will cause strategic loss, or if procurement is a competitive differentiator. Significant savings can come from renegotiating existing contracts alone. Outsourcing is not the only option for improving procurement.
Models of procurement outsourcing. They are numerous because the procurement organization is modular. It can be defined as comprising from four to nine functions. Four basic functions include strategic sourcing, requisitioning, transactional buying and accounts payable. One example of a procurement outsourcing model considers three views. First is transactional procurement outsourcing, which outsources the processing of requisitions into purchase orders. Second is indirect procurement outsourcing, which outsources procurement of goods and services that do not end up in the firm’s end products. Third is direct-spend procurement outsourcing, which outsources the acquisition of materials that become incorporated in the firm’s products. This third type can also include outsourcing the handling of those materials, such as transportation, warehousing, and such.
Another model has two options. The first is transformational outsourcing, which involves outsourcing just about the entire function. The goal is to fundamentally change (transform) how procurement is handled. The second is transactional outsourcing, which outsources discrete components of procurement. Generally the goal is to reduce process costs.
Several other models are also discussed in this report. A main point is that full-process or transformational procurement outsourcing potentially has both higher risks and higher rewards. It can be much more disruptive because the company needs to adopt the provider’s processes and fewer suppliers (not your local favorite supplier). But, it holds out the promise of implementing more cross-process best practices, thus leading to a much better procurement operation.
Companies that opt for full-process outsourcing understand both themselves and outsourcing. Those that are not as well versed in managing outsourcing generally start by outsourcing pieces, beginning at the transactional end of the spectrum. Few outsource the strategic portions of procurement, and if they do, it is to transform those portions quickly and then bring them back in-house in their new transformed state.
Like other forms of business process outsourcing, consultants, providers, and executives who have been involved in procurement outsourcing recommend some best practices.
Best practices in procurement outsourcing. One is to assess and understand yourself first—your impetus for considering outsourcing, the complexity of your procurement operation, the maturity of your company’s culture to adapt to outsourcing, and the performance of your current procurement operation as benchmarked against others. If you have not done this assessment, consulting firms and outsourcing providers will do it for you. In fact, most providers won’t sign a contract until they have done such an assessment, to understand your status, to point out the gaps they could fill, and to help you choose how you want to proceed.
A best practice in negotiating is to ask the contending providers how they would handle various aspects of procurement—the technology, vendor management, customization, and people, to name just four. Don’t settle for generalities, get specifics. Also, get them to tell you where the opportunities lie. Tap their experience. Another best practice is to establish a governance structure that permits flexibility. Expect change. Build it into your structure. And do not short-change change management. Success in outsourcing procurement requires changing procurement processes and suppliers, something few people want to do. It is a major change management effort, and this change effort cannot be outsourced. It’s an inside job. A provider can assist, but it’s up to the client to move employees to the new ways of acquiring goods and services.
In the area of metrics, a good practice is to define a process for changing them, either based on elapsed time or events. For example, metrics for the provider during the first year will focus on change management. Metrics for the client (and clients do need to measure themselves) also will focus on achieving the transition. In the second year and beyond, metrics for both will switch to achieving greater savings in categories and increasing utilization of the e-procurement system.
There are also best practices around using the new procurement technologies as levers to instituting change. They can be used to improve process efficiency, enforce approval processes, and lower costs. But they do bring cautions. Understand where your data is stored and how it is protected. You want your pricing data kept confidential.
In conclusion, outsourcing procurement is about gaining leverage, otherwise you would not do it. The insights in this report aim to better equip you to obtain that leverage using the experiences of those who have gone before…”
Contributors: SIGCategories: SIG U Resource, Whitepaper
SRC Type: Outsourcing, Procurement Outsourcing / Transformation, Sourcing