Outsource Magazine

This article originally appeared in Outsource Magazine Issue #25 Autumn 2011

Procurement outsourcing, which has been predicted for many years to take off, is finally moving into the mainstream. More and more large organisations are waking up to the fact that significant improvements to the bottom line are possible through improved management of non-core or indirect expenditure (otherwise known as GNFR in the retail sector). As top-line growth is hard to come by in the current economic climate, the opportunity is simply too good to ignore. Whilst it is a largely misunderstood and complex world fraught with pitfalls to the uninitiated, the good news is that there is much to learn from the early adopters of procurement BPO. Below are my top ten tips to consider when embarking on your procurement BPO journey.

1) Expect the unexpected.

The ROI achievable through procurement BPO, once fully operational and embedded in an organisation, can be as high as 15 to 20 times the outsourcer’s fee. This is often a pleasant surprise to organisations. And the benefits should go way beyond savings. With the right provider, procurement BPO should result in real improvements in business performance, and be challenging and influencing fundamental business rules. Procurement BPO can be the change agent  for a transformative procurement agenda.

2) The old adage of ‘don’t outsource a mess’ is different in procurement BPO.

Clearly, outsourcing a mess is never advisable. However, as the nature of procurement BPO means that you are about to achieve something that you can’t afford to achieve internally, it’s not possible to get your house in order and then handover to an outsourcer (i.e. the traditional lift-and-shift approach of Finance & Accounting, Information Technology and Human Resources outsourcing). Focus instead on defining the areas for which you want to hand over responsibility and what, therefore, you need to have in-house to maximise the chances of success.

3) Do not try to overlay traditional outsourcing models onto procurement and expect the same result.

Procurement BPO is about doing things better, challenging potentially old ways of thinking and creating value for stakeholders across the business who each have very unique challenges and drivers. Traditional F&A, IT or HR BPO tends to focus on efficiency (through technology applications and/ or labour arbitrage) to carry out repetitive, tactical level tasks – usually in low-cost labour locations. This traditional BPO methodology and approach simply does not deliver the same results (comparatively speaking) when applied to procurement as the skills, knowledge and expertise required to deliver a value-adding service cannot be automated or operated in a rule-based environment.

4) Make sure the fee model encourages the behaviour you want.

We have seen procurement BPO deals fall apart after two or three years because they are based on contingency fee models (i.e. the outsourcer is largely or solely remunerated as a percentage of the savings they deliver). Such a fee model appears attractive as it seems low-risk and can help with getting budget for the outsource. However, be careful what you wish for. These types of models have flaws as (a) they are not sustainable, and (b) they encourage the outsourcer to maximise the savings at the expense of service or long-term solutions. If you want a sustainable long-term partner working in your best interests, it’s best to agree a sensible and fair level of remuneration, with some performance bonuses as appropriate, so that the outsourcer is willing to invest in you, thinks long-term, and in your best interest.

5) Senior level support is essential.

Effective and successful procurement needs to be positioned at the heart of a business, reporting to the senior executive team and with their full support – otherwise it runs the risk of becoming a tactical function focusing only on supplier relationships.

6) Avoid consortia models.

Our experience of consortia models, or aggregated buying, for big businesses is that they don’t work. Typically, a better solution is achievable, in terms of cost, service and supplier innovation, by contracting directly with a supplier who structures the commercial arrangements to your individual and highly specific needs. If the correct techniques are deployed, competitive pricing can be achieved without the need to aggregate volumes across multiple organisations.

7) Technology is only part of the solution.

Procurement software (such P2P, e-sourcing, spend analysis, etc.) brings some great benefits and can help drive compliance. Technology is an essential part of your overall approach to procurement. But it’s only a part of the picture. The really big benefits from procurement come from changing business rules and ultimately people’s behaviours – and this requires a diverse range of skillsets, from change management, leadership and influencing, through to category expertise, process experts, programme management and transactional support.

8) One-size fits all won’t work.

Look for a tailored operating approach, and align with a partner that truly understands your business, the people within, the challenges and the market. Large organisations have complex and highly specific needs and any solution needs to be matched accordingly. Providers that have a blueprint or standard operating model will force their solution onto the client – look for providers that have a flexible delivery approach that meet your exacting requirements.

9)  What gets measured, gets done.

Be sure to use the right metrics. Focus on the results and outputs that you want to achieve, such as savings, spend managed, stakeholder satisfaction, the number of innovative ideas, compliance, revenue generation, etc. Then let the outsourcer worry about how best to deliver that. Don’t try to measure their inputs as they need the flexibility to change how they operate as the relationship develops and your needs and wants ebb and flow. If you limit them, you will limit the results they can achieve on your behalf.

10) Engaging with people and influencing their behaviours is key.

I believe this is the most important factor to look for in an outsourcer. Assess how well they are able to integrate into your organisation, build relationships, understand needs and wants, influence people and, most importantly, build trust. Procurement BPO is not something that is done to a client but done with the client. The provider must have a close cultural alignment in order for the relationship to succeed.

Procurement Business Process Outsourcing is rapidly becoming a highly effective strategy for today’s businesses. It can enable large businesses with disparate and dispersed spend centres to benefit from best practice processes, frontline innovation and technology, deep and broad category knowledge and effective stakeholder management capabilities which, as I mentioned above, are simply not attainable in-house.

Ultimately, it’s vitally important always to realise that every organisation’s procurement BPO journey is a unique one, but that there are many lessons to learn from the early adopters of procurement BPO to help the next generation of adopters avoid unnecessary – potentially very costly – mistakes.

About the Author

Vinny Patel is Commercial Director for buyingTeam (www.buyingteam.com), Europe’s largest pure-play procurement outsourcer and solutions provider.