Procurement Intelligence Unit

Effective execution of procurement outsourcing activity mandates an effective and functioning partnership model - it's something that remains an elusive goal and is the cause of the vast majority of outsourcing contracts (ITO or BPO) are doomed. Until and unless outsourcing providers find themselves a seat at the table with their clients... ain't going to happen, Charlie. Why is effective partnering so darned difficult

Because it's difficult to articulate and follow through on incentives and rewards. Many times we just say if you do A, B, and C, we'll give you more business. What does that mean and what if that business doesn't come in? Or what if something better comes along? Executable plans must be drawn up with clear expectations, incentives and consideration. Then touch base at regular intervals to review and revise as necessary.

"The administration of low-cost, high-volume contracts are time-consuming and non-strategic," is the imperative here. There is still a powerful case to be made for the outsourcing of non-strategic spend, allowing a companies procurement team to deliver effective supply chain management and the delivery of products crucial for their smooth operation. There is almost a cult around the delivery of cost savings; but should that be the only function of procurement? No. There's two ways for a business to make money, a) spend less and b) sell more. Surely the procurement function of any business should operate to make that business more efficient and thus enable b) to take place. With that in mind, there's still a powerful case for non strategic procurement outsourcing, letting your internal team concentrate on the important opportunities.

Effective collaboration and partnership requires a level of softer skills well above the norm. To make such deals work it isnt enough to spend months constructing a "tight" contract, its about really understanding the dynamics of the deal and getting buy in from sceptical stakeholders. Building a team with such skills sets is critical to the success of this type of venture

Some companies are good at it....some "not so good"...I do not think this is the end of Procurement Outsourcing. It has a long way to go on the product life-cycle. Talented professionals are becoming more and more difficult to find...there will have to be some scale created where Category Managers can contract for more than one client for their class of goods and services...can you imaging how many repetitive RFP's are out there in the world for the same commodities? It can get mind numbing if you think about it...

Matthew...excellent points! The wave of the future for internal procurement professionals is to be on the forefront of product development and vendor relationship management...passing off transactional activity and commodity contracting is a great way to free up their time for more strategic and value-add contributions!

While I agree with Matthew (to a point) - does low value and transactional actvity lead to enough revenue to outsourcing organizations to make money? and doers it lead to enough of a savings to the client to warrant the risk? If it's low value and transactional - why wouldn't you hire some junior people in-house? what value add does an outsourcer provide in this case? better visibility in contractual details (don't think so). Better cashflow management (Nope) Better vendor management? (Don't think so) - so why outsource?

Backend process e.g. Accts Payable process can be outsourced. Lowend non-critical categories may be inhouse by juniors (#Casteels) Critical large ongoing contracts need vendor relationships, strategic alliances and VMO @ the table to optimize cost reliability flexibility

At a high level outsourcing makes sense but often, in application, the solutions are found wanting. Procurement departments are duty bound to reduce costs but it is short sighted and counter productive if outsourced models exponentially increases the degree of difficulty associated with the commodity in question.
Many outsourcing companies are international and demonstrate significant global sourcing expertise but lack an ability to balance the needs of their clients. Geographical and challenging climatic factors can sometimes derail a great “on paper” solution. A poor outsourcing solution can quickly create a great deal of noise and become a liability in the portfolio. Successful outsourcing solutions require exhaustive information gathering, objective analysis of suitability and an almost evangelical approach to change management. One size does not fit all and it may just be that your organisation will be best served by the junior people in-house as Hans suggests. Too often the benefits of partnerships and outsourcing never materialise.

I disagree that there's any decline in procurement outsourcing. However, it has been slow to take off. And the reason is that there's a great deal of confusion out in the market place as to what procurement outsourcing is, and what it can deliver. There's a big difference between outsourcing for efficiency gains (which typically entails outsourcing the transactional end of procurement, whereby the business gets the same service they had before, but its run off shore) and outsourcing for effectiveness gains (where the service to the business is done much much better).

It's this effectiveness area where the large gains are to be had. Too many procurement functions end up focusing on the supply market and try to reduce costs through negotiating better deals - they end up here as this is what the business targets them on. However, the real value sits in turning procurement's attention inwards at the business - to challenge ways of working, policies and ultimately behaviours. If you outsource the management of the supply market only, its doomed to failure because there's a limit to how much cost can be taken out of the equation before the job becomes one of mitigation of price increases. Companies should not just outsource the transactional end of procurement, nor sourcing, nor SRM, nor contract management nor even category management. What needs to be included is the key element of effective procurement, and that's business engagement. i.e. the 'business partnering' element which provides leadership across functions to manage the change management required. You have to realise that procurement works across functions with no mandate. Without strong leadership and change management skills, procurement outsourcing will always run the risk of failure. And successful 'effectiveness' procurement outsourcers are experts at this.

Good consultant speak - and theoretically sound thought - but I ask you (again) - time and time again I've seen the major issues being lack of communications and willingness to partner - if collegially it's difficult to accomplish - where do you think an external source would be able to wring ultimate benefits out of the equation if the hypothesis is "effective partnering"? I agree, perfect powerpoint presentation but reality, alas, doesn't happen because the powerpoint says so

Companies I've run have been providing outsourced procurement solutions in corporate travel for 15 years or more. It is absolutely true that subject matter experts who manage a broad cross section of corporate travel spend have unique insight and data points that enable real "notional" savings. Unfortunately, the only savings that should matter are "real" savings. This requires the company and it's management to enforce the necessary behavorial shifts and look at reports that measure program performance. It's rare to find a CPO who isn't interested in driving savings, but rarer still is one who can effectively influence the behavior of employee purchase decisions. Squeezing suppliers is easy and largely ineffective in the long run. Delivering real savings by changing emplyee behavior remains elusive. As certain as a bucket with holes, you can't possibly hope to hold the contents for very long. Procurement outsourcing can be really effective, but somewhere along the way, someone forgot to let the employees know that they're vital to ANY effective long term solution.

So far as I am aware, Procurement Outsourcing only represents a small part of Xchnging's business? I think it may be a little premature to start talking about the imminent death of Procurement Outsourcing.

I agree.

Many companies cannot economically justify the level of investment needed in category specialists, market intelligence and integrated processes and tools to truly optimize their indirect spend. By leveraging the infrastructure that providers have built and driving provider accountability for realizing savings, companies that have adopted procurement outsourcing are able to extend the reach of their procurement organization- across spend categories, geographies and the entire procurement process – while transforming procurement’s role and accelerating its impact on the business.
With the right provider capabilities and joint focus on meeting performance goals, procurement outsourcing can and does provide hundreds of millions in savings for many procurement leaders.

This is interesting as I have been unemployed since last October and I am looking into the possibility of setting up BPO on my own.

I assume that the contracts were with big name clients and so in the climate it is not surprising that these type of contracts are cancelled. However, I feel that there is certainly room for the smaller company that has withdrawn all it can but still requires some expertise, but only for projects or on a ad hoc basis.

At least, I hope i am right!!

It could be the first piece of the Domino....In my view procurement has at least one major role which could be hardly or not at all outsourced: influencing the internal customer consumption behavior. Any thoughts?

could not agree more ... Although it is crucial that the Board gives the authorithy to the procurement in influencing the internal customer behaviour.. Rules, roles and procedures must be established and the responsibilities for unreasonable consumption are to be managed by top management

It could be the first piece of the Domino....In my view procurement has at least one major role which could be hardly or not at all outsourced: influencing the internal customer consumption behavior. Any thoughts?

Totally agree, Internal customers need to behave responsibly, after all the more wasted has a direct impact on Companay expenditure and Profit and eventually your wages! Control is of utmost importance in all aspects of the Business. Everyone need to perorm their work from a prospective of being a "co-owner / share holder " of the Company we work for instead of being an Employee!

Totally agree, Internal customers need to behave responsibly, after all the more wasted has a direct impact on Companay expenditure and Profit and eventually your wages! Control is of utmost importance in all aspects of the Business. Everyone need to perorm their work from a prospective of being a "co-owner / share holder " of the Company we work for instead of being an Employee!

I find that outsourcing has a limited value and is useful as a tool only for certain categories, and within a limited timeframe. For instance, if you need highly qualified buyers for a project, and this staff will not be required for future SCM work in the organisation. Otherwise inhouse teams are cheaper, more motivated, and feel that they are part of the overall business. This adds far more value to the organisation.

Whether the outsourcing option is dead or alive, what's key for procurement teams is remaining in charge of the agenda. If outsourcing is provided to procurement as an "option", chances are its already decided and could reduce value. If its evaluated by procurement teams in the same way as "make or buy" is in the sourcing process, then leadership can be maintained by procurement; I think there are plenty of areas that can be explored in this area, although in line with most above, the opportunities are greatest by maintaining a flexible approach and not ignoring the need to manage the resources.

Procurement Outsourcing Providers have the relationships with vendors that stretch far greater than one in-house procurement group; and the relationship is based on much more than price alone. Many in-house procurement groups bleed the rock dry on price and are left bidding the business out every year and awarding it to the lowest cost. In turn, leaving no room for delivery of value from their vendors.
This practice also impacts the production and sales side of the business. Many times schedules are not met by the low cost vendor; remember the in-house procurement bought on price, not preformance. The focus of any company should be production and profitable sales, not procurement. Materials are a necessity for a production line, not a profit center. Also Procurement Outsourcing has a tremendous value. A team of professionals can quickly assess the client companys needs and deliver accordingly for a nominal fee. Hire a Distribution and Procurement Outsourcing Group and client companies will gain even greater value with little money out. Keep in mind that outsourcing is also a business expense and has great tax benefits to companies.

I think you've been a bit harsh on xchanging.  It is a profitable company and currently restructuring to become even more profitable.  Also the problems in the US business has to do with US worker compensation rather than procurement outsourcing.