Deciding When To Build or When To Buy a Procurement Function (Or Parts)

Despite its Herculean efforts, procurement is failing at indirect spend management. Stakeholders continue to view the function as transactional or (worse) an obstacle to overcome.

Most procurement leaders still wrestle with powerlessness in the face of poor stakeholder behavior. Efforts by Procurement teams are hampered frequently by a short-term savings focus and onerous processes.

It's not procurement's "fault" directly: it’s a function of the unfortunate management climate and culture in many companies, a culture where ‘support functions’ can receive lip service if you are a frontline function.

What Has Been Procurement’s Response?

In almost all cases, it’s to soldier on with do-it-yourself or DIY. Perhaps upgrade the CPO role. Import some new talent with “influencing skills”. Great soft skills mean individual heroics are possible, but nothing fundamentally improves and even the best procurement pro can fail in a hostile environment.

But why do procurement teams continue to default to DIY mode to solve their delivery problems when it hasn’t moved the dial? What is going on when Procurement — the custodian of external capabilities — are reticent to use external services themselves?

What is happening in Procurement when many other functional leaders (CIOs, CMOs and CHROs, for example) routinely outsource or use a managed services for some (or all) of their functional activities?

This blog offers some clues.

The Value Proposition for Managed Procurement Services or Procurement Outsourcing

The value proposition is quite simple really:

• Focus on the buyer’s core activities.

How you buy corporate spend is not a strategic differentiator for your business, it’s a distraction. Alternatively, lots of procurement processes are administrative/low value add. So, the time spent on these activities should be automated or managed elsewhere for you to focus on what actually matters.

• It’s the service provider’s core business so it will get to more value, faster.

The provider has access to the best tools, templates, assets, benchmarks, market knowledge, supplier influence, templates, etc. The provider will invest in the ‘cream’ of market-making specialists whose costs can be spread across multiple clients.

• Value will be ‘taken’ and not lost through leakage.

Where the in-house team lags in terms of systems, a platform-as-a-service or PaaS arrangement allows the link from contract to payment to be preserved by creating processes and controls to promote usage of those great sourcing contracts.

Sounds great so far, right?

The value proposition of managed procurement services/ procurement outsourcing for indirect spend appears on the surface very logical.

So why do so few companies actively explore and adopt these engagements?

What Are the Barriers for a CPO to This Value Proposition?

Here are 8 reasons a CPO rarely adopts this approach:

1. Limited CPO remit

CPOs aren’t all-powerful. In many companies, the CPO doesn’t get a whiff at the “core” spend.

In retail, procurement gets to lead on ‘goods not for resale’ but commercial/trading teams that drive the business performance directly are usually managed elsewhere.

In financial services, the vast majority of spend is technology and professional services related, which are by definition indirect spend.

A small number of strategic partnerships and vendors will make up the majority of spend and will typically be closely ‘owned’ by the business and executive, not procurement.

If a procurement team has more than a cursory seat at the table, it’s doing better than most other procurement teams. Still, too often, procurement is left as a rubber stamper or left on the sidelines.

2. Procurements status as a support function means it's starved of investment

According to procurement and sales guru David Atkinson’s ‘10 Procurement Challenges’ , the first challenge around ‘Status Anxiety’ really resonates. Calling in outside help can be considered a sign of failure. Making a case for investment in services or technology is surprisingly difficult, despite the ‘savings’ lever beloved of CFOs and CPOs.

Many procurement teams struggle to get system, resource or training investment because they are considered low in the pecking order — the value proposition of the team is lost or is unclear. It usually takes an incoming CPO with sponsorship to drive the change.

3. The 10x CPO

On the other extreme is the uber-confident CPO who extolls that his in-house team is delivering world-class multiples of value compared to the cost base. So, no help is required, thank you very much.

Whether the measures of savings are accurate or believed by the business is an argument you can’t win as a seller. If your modus operandi has worked until now in your career: a three-year CPO journey of fly in, bring in the hit squad, deliver the hard $$, fly out, (leave behind carnage!) ... why change?

4. Risk to senior-level relationships

One of the most interesting aspects of indirect procurement is that as a buyer, you interact with senior functional budget-holders as a business partner. The thought of passing over these relationships, or some of the key interactions introduces risk and fear to the buying center for a procurement outsourcing play.

5. Procurement’s short-term myopia

Procurement is usually a reactive function. 30-50% of its work is unplanned, driven by the business. As a result, CPOs and their teams are over-stretched, rarely able to focus on strategic thinking and even more rarely to evaluate their own operating model, unless external pressure is applied.

Also, in-house teams suffer high attrition compared to other functions so keeping a steady ship to manage the planned work is an accomplishment in itself.

6. Alternative delivery vehicles appear more compelling

DIY remains the most common route to achieving procurement goals (see point #3 above).

In the U.K., there is also a buoyant pool of contractor talent. And short-term consulting ‘hits’ to drive cost out have proven effective for many blue-chip companies during a crisis. So, if externals are needed, this is a tried-and-trusted 6-18-month approach. The managed services marketplace needs to do more to differentiate its offering against other solution options to justify its typically longer tenure and slow burn value proposition.

7. Complicated RACI

From a sourcing life cycle perspective then, who does what in the process: stakeholders, finance, retained procurement, service provider… and who signs off at various points, becomes complicated quite quickly? Particularly because procurement of indirect spend is always an advisory activity and the final decision sits with the budget-holder.

8. Commercial incentive misalignment

The case for procurement outsourcing is usually predicated on a savings number. But stakeholder priorities change over time and rarely is savings a priority in investment categories (unlike marketing or technology). So commercial models need to flex with changing needs and rarely do. And, of course, measuring a save is tricky in so many scenarios. This all leads to a lack of trust in outcome-based value propositions despite the hype.

When Do Managed Procurement Services Work Out for You? Here's a Framework to Evaluate them

In an evolving world, it’s good practice for CPOs to critically evaluate the function once or twice a year and evaluate the journey of their own operating models against options available in the market.

The following two matrices can support this evaluation:

• Category BPO evaluation

Firstly, by category (diagram 1, below). Assess each category based on its business impact — is it business critical? Does it drive competitive advantage? Or not (many procurement teams instinctively overstate the importance of their categories)?

Then assess the capabilities you have today in managing the procurement of these categories — do you have the knowhow, resource processes and tools in place to manage this category effectively or not? Is future investment in this capability merited?

• Process BPO evaluation

Many firms want to retain category activities but remove the ‘pain’ of some processes. In this decision model, the x-axis (in-house capability) remains the same, but the y-axis varies depending on your business’ scale.

• If you are in a large (Fortune 500) organization, your y-axis becomes ‘economies of scale’ relating to the process: do you have the scale of volume of activity to merit specialism to driver automation and efficiency

• If you are a mid-sized enterprise (revenue under €5 billion), there are few procurement processes where you will have the scale to specialize.

Instead, consider the relative contribution each process makes to the operational effectiveness of the business. Does the absence or failure of this process prevent core business from happening or does it mean significant material impact on stakeholder returns?

This evaluation drives four outcomes at a category level:

1. In-house 

Here there is a clear answer at a category and/or process level.

2. Minimize/outsource 

Here the goal is to either automate, remove or simplify and ensure retained talent is not distracted by these activities, meaning BPO is a potentially useful option.

3. Build outside then review 

Here BPO can be an accelerator to build capability and then once maturity is achieved then the business can reconsider the next step.

4. Cost-benefit analysis 

In this scenario, the answer is not clear-cut and will depend on the marketplace commercial offers and the cost to build in-house estimates.

The value proposition of procurement BPO is predicated on having the procurement leadership team open to critical self-assessment of their capabilities, using the same skills and competencies they apply rigorously to other functions upon themselves. The decision models in this article should be applied at least annually to the function and certainly at trigger points like when attrition or new leadership arrivals or new priorities emerge.