Not Sure What Procurement Outsourcing Means? You're Not Alone!

 

Not Sure What Procurement Outsourcing Means? You're Not Alone!

Is lack of understanding about procurement outsourcing holding back its wider adoption?

Six years ago I was addressing an audience of European procurement professionals about market trends in indirect procurement business process outsourcing (BPO). At the start I provided a brief definition of terms  -  but evidently not clearly enough. After I had finished, I was approached by one chap who hadn't quite grasped what I meant by "business process outsourcing" and how it applied to procurement.

Fast forward to 2011, and indirect procurement BPO is far more widely understood. But even today some procurement professionals can get confused between the role of procurement in supporting the selection and management of vendors for the provision of business process services for other corporate functions and the application of BPO to the procurement function itself. And we still see in NelsonHall research a number of concerns, which I believe to be misconceptions, expressed by procurement professionals about what outsourcing indirect procurement might mean to their organization. Furthermore, it seems that CPOs seldom appreciate the potential strategic benefits in enhancing the role of the indirect procurement function. Because of this, CPOs tend to use outsourcing as a tactical rather than a strategic initiative, using external services providers for niche activities. As such, they are failing to leverage outsourcing as a means of raising the profile and effectiveness of the indirect procurement function in working with business units. 

CPOs in many organizations only need to look to their colleagues in human resources to see how they are using business process outsourcing (BPO) to help the in-house HR staff focus on fulfilling a more strategic role

Accordingly, this article:

• Takes a brief look at some of the common misconceptions about indirect procurement BPO
• Discusses what NelsonHall research reveals about common business issues faced by indirect procurement functions, and their top priorities
• Takes a pragmatic view of the various forms of outsourcing engagement and considers how indirect procurement business process outsourcing (BPO) can be adopted as a means of assisting the indirect procurement function achieve some of these aspirations

Some Common Misconceptions

•1.         "It means losing our in-house people. We would lose internal expertise and we would then have difficulty bringing back in house if there was a problem": this fear of diminution of empire has historically been the most common misconception I have heard. In fact, in many forms of indirect procurement - particularly where the services provided are supporting sourcing activities - there is no transfer of personnel to the BPO provider. Instead the partner provides additional capabilities to the client to broaden their indirect/GNFR category coverage, improve their ability to analyse their indirect spend, improve their catalog management, and so on. These types of outsource are about improving effectiveness, rather than about using lower cost personnel

•2.         "We already have a large scale operation with agreed supplier discounts and there is not the scope to gain savings from aggregated buying": while some vendors historically emphasized their aggregated buying power - a possible misconception by these vendors -  the tendency today is to emphasize the additional savings that can be realized from better sourcing, from supplier compliance, and also from best practice in procurement that minimizes non-compliant buying

•3.         "It reflects badly on the caliber of the in-house function/ Procurement is a core function". Finance & accounting (F&A) BPO is a mature and well established form of outsourcing with proven benefits - with these continuing to evolve even today. I have never heard it said of an organization that has outsource finance & accounting that its internal function must have been underperforming: on the contrary, outsourcing F&A tends to be a mark of a mature sourcing policy

•4.         "We will lose our relationships with key suppliers": where the outsourced activities include strategic sourcing, the categories initially outsourced tend to be those that have not been managed well internally - often because of lack of resources. Also, as will be discussed below, one of the key potential benefits from outsourcing some indirect procurement activities is to allow the in-house team to focus on more strategic activities

•5.         "I don't see any need". This response is perhaps the most surprising. The indirect procurement function is always, by its very nature, constrained in its capability to manage all the major indirect categories, and to be able to support business units in sourcing and procuring non-routine items - some of which can be both high-value and of strategic importance to the business (for example marketing campaigns). The situation is not getting any better: in some organizations CPOs have had to cut their headcount; in others, the indirect procurement function is challenged to be able to support an organization that is entering new geographies. On top of this, many CPOs have been looking for years to raise the profile of the indirect procurement across the organization: something they will be challenged to do without considerable investment. It is not that CPOs are not challenged, it is that they do not appreciate how outsourcing might assist them address some of their key issues.

So what are these issues?

Some Common Challenges in Indirect Procurement

NelsonHall's in-depth interviews with hundreds of CPOs and CFOs in a number of studies have highlighted some commonalities in the challenges that the indirect procurement function is facing in their organization, in addition to overarching concerns about the rising costs of goods and services. If we look at seven of these common challenges, there are significant similarities across sectors.

Need to develop the role to be able to work more effectively with business units: In our research interviews, executives do say they are generally highly satisfied with the caliber of the personnel in their indirect procurement function. But notably, over half express only low or very moderate levels of satisfaction with their ability to manage indirect procurement across the organization and to control spend levels. In particular, most do not rate highly the ability of their indirect procurement function to influence attitudes and behaviors across the organization or to support innovation. In one recent survey 48% of the procurement organizations surveyed said their ability to implement major change across the organization was low.

Procurement teams have core capabilities in supplier negotiations and in the purchasing process. Working with business units requires a different set of "softer" skills, acting as sourcing consultants to the business, bringing sourcing and procurement expertise into projects at an early stage where they can have most impact. However, the norm today is for business units to bring in procurement personnel to provide support in projects fairly late in the process (if at all): as a consequence they are unable to introduce best practice and advice. These "softer" consultancy skills require training: in a survey of 160 organizations conducted by NelsonHall, several procurement execs referred to the need to improve staff training as their top priority

Need for broader category coverage:

Indirect procurement is both constrained in terms of the number of resources within the function and in the huge range of indirect procurement goods and services means that it is virtually impossible for an organization to have category coverage and market knowledge across all areas of spend.

Most indirect procurement departments are currently able to provide limited support to business units for specialist goods and services.

Services procurement remains a challenge for many firms, particularly in areas such as temp personnel and contract labor, legal services and professional services. The issues may center on contract management or even on gaining access to appropriate talent across geographies.

Need to be more efficient: Many organizations would like to improve the efficiency of indirect procurement. Our research highlights, for example, moderately low levels of satisfaction with:

• The amount spent on indirect procurement people as a proportion of indirect spend under management. In many organizations the cost of the department is increasingly under focus and many CPOs are being faced with budget cuts and being tasked to "do more with less"
• The amount of indirect spend that is e-sourced.

Need for better processes and for greater process standardization: Of course optimizing procurement processes can lead to both efficiency and effectiveness improvements.

Nearly two thirds of the procurement organizations surveyed in one In a NelsonHall research study said that dealing with issues around inconsistency of sourcing and procurement processes across subsidiaries or geographies was a major priority.

A few large enterprises have a strong culture of compliance coming from the top that permeates all common corporate processes. In procurement this can be illustrated by a "no PO, no pay" policy. But in many organizations the CFO would like to see greater PO penetration.

Process improvements that CPOs would like to see that would help drive compliance focus on streamlining and generally making it easier for line managers to make authorizations, or to request the addition of suppliers to preferred lists. Compliance is more likely to happen when processes and systems are optimized and when buyers are able to select goods and services that meet their requirements.

Lack of time and resources to keep up-to-date with some key activities: our research in various studies throws up increasing levels of dissatisfaction with

• Supplier database and catalog management (48% expressed low satisfaction in one study)
• Contract monitoring (52% expressed low satisfaction in this same study)

These are routine activities, but important in process terms.

In addition, the indirect procurement function is challenged to maintain up-to-date knowledge about all of its indirect supplier base, or indeed to manage its smaller indirect suppliers.

Lack of management information: Organizations in a number of sectors, most notably financial services, express low levels of satisfaction with the availability of management information to enable a detailed analysis of spend by supplier, department, category, etc.

Inadequate or out-dated IT: The indirect procurement function tends to be in the shadow of direct procurement when it comes to investment priorities. Complaints about IT systems that are disjointed or do not provide information are particularly common in mid-sized and manufacturing companies.

How Can Outsourcing Help Indirect Procurement Meet these Challenges?

In fact, a surprisingly high proportion of organizations state they are already outsourcing some indirect sourcing and procurement activities, but typically at a tactical level.

• In most cases, they are using an external service provider for sub-process support in an activity such as catalog maintenance, one of the routine tasks the in-house function does not have time to do. These services are typically provided by a handful of personnel based off- or near-shore, and the principal benefit sought is labor arbitrage for a background activity. CPOs who have outsourced this type of support activity express very high levels of satisfaction but tend to regard it as offloading a back-office task
• Some organizations are also using external partners, often offshore, to monitor and analyze spend patterns and supplier compliance. Again these services are provided by a handful of personnel, typically using the service provider's tracking and analytics tools
• The decision to outsource transactional procurement activities around PR-to-PO processing is often led by the CFO rather than the CPO: the major benefit sought centers on cheaper, more efficient, and faster processing, with perhaps some analytics bolt-on activity
• Some organizations use an external partner to manage e-auctions for spot purchases
• A few organizations have chosen to work with external partners for sourcing and category management services across specific areas of indirect spend they face difficulties in managing effectively in-house. These service providers bring category expertise, market intelligence and insights. But often organizations start with a few categories at first and it can be years before the coverage is broadened to cover significant levels of spend, some of which remain unmanaged.

The reality is that very few organizations have outsourced indirect procurement as part of a major strategic initiative.

In order for indirect procurement to deliver maximum realized savings while supporting the business units get easy access to appropriate quality goods and services, a holistic approach is needed to address all the issues discussed above. All of the following need to be in place to optimize indirect sourcing and procurement:

• Broad and deep sourcing and category management capabilities
• Access to up-to-date tools for activities and processes such as reverse auctions, supplier enablement, e-invoicing, e-procurement, spend analytics
• Good visibility into spend and trends
• Strong administration around contract management
• Savings that have been identified for each sourcing project clearly recorded
• Realized savings allocated to business units based on their spend profiles
• A fast, efficient, and overall better procurement service for buyers and likewise for the settlement service for suppliers
• Standardized best practice processes from source through to pay, with little manual interventions
• Process compliance across the organization, with ability to identify any issues early on in order to take remedial action
• Good collaboration between indirect procurement and business units for non-routine sourcing projects, with business units picking up insights on good practice

Achieving this without using an outsourcing partner can be an expensive and lengthy transformation. But - and this is an important proviso -  outsourcing engagements where the benefits sought focus on one or just a few of these priorities will only achieve tactical benefits.

Many finance and HR functions have succeeded in progressing from a situation where they were spending an inordinate amount of time on basic transactional processes, often by outsourcing these activities in order to enable the retained organization to fulfill a more strategic role.

Indirect procurement seems to be behind the curve and still be on this trap in many organizations. Some in fact are having to contend today with an increasing number of transactions: as departments look to economize they hold lower supplies and rely on more frequent orders, creating an additional workload on procurement. To an extent this is a function of the immaturity of the market and also of the vendor landscape but the coffee is brewing and its aroma can be smelt.

 

In summary, indirect procurement departments need to work out a strategy for establishing themselves as strategic business partners to their internal customers, one that includes how they use outsourcers to support them in making this important transition.

In order to do this, the indirect procurement function is likely to leverage the outsourcer in a variety of ways. These are likely to include the provision of insight and assistance in introducing process best practice; access to domain experts to broaden category coverage; the application of a range of tools; process and spend analytics for monitoring and reporting; and significant support in transactional activities.

The function will then gain recognition across the organization for playing a key role in helping drive business performance rather than for simply providing a support service.

 

Rachael Stormonth, senior vice president, NelsonHall

Rachael.stormonth@nelson-hall.com

Twitter.com/rstormonth