Procurement outsourcing is finally gaining ground as the next real dollar savings capture for organizations across all industry verticals. In my role as an advisor, I have seen a sharp increase in new outsourcing contracts as well as renewals recently.
Procurement outsourcing has always had the value proposition of deep category and sourcing execution expertise, combined with efficient operations, strong controls and robust analytics to free up resources that can be redirected to more strategic purposes. Given the rapidly maturing capabilities and global expertise of procurement service providers (PSPs) today, there is little question that outsourced procurement now delivers superior levels of savings when compared with internal-only solutions.
So why has adoption of procurement outsourcing taken this long? Primarily because it is different than other forms of outsourcing and, until recently, not quite well understood by many procurement executives and therefore has fewer natural executive sponsors. Second, a few organizations may have experimented with early procurement outsourcing projects that were either not structured correctly or resisted by procurement people with a natural fear that they might end up outsourcing themselves. Third, with little industry advice available, early adopters may not have managed their procurement service provider well enough to realize the full potential of the model.
The following three strategies will help you get the most from your procurement outsourcing engagement.
1. Design each aspect of your management to be “fit for purpose”
The solution provided by a PSP in essence comprises a hybrid of different services. These include a mix of strategic consulting (category strategy), recurring project management (sourcing execution), fundamental analytics services (spend and other analytics), and transactional processing (procurement execution).
Each requires different levels and types of interactions, and different measures from an oversight perspective. Also, since virtually everyone in a company is — one way or another — a “customer” of procurement, criteria for customer satisfaction will vary widely by stakeholder group, and the solution has to balance satisfaction of very different constituencies across the organization.
Different vendor management skills are required for each aspect of PSP supervision. Consulting is measured by effectiveness; project management requires the ability to keep disparate team members on task and on schedule; analytics must produce relevant, actionable insights; and transactional processing is measured by its accuracy and efficiency.
Your management structure over your PSP relationship should include the capabilities to evaluate the effectiveness of each category recommendation. It should also foster the implementation of these recommendations to understand the complexities of each project and resolve roadblocks, to ask the questions of the analysts to determine what actions to take next, and to oversee operations. Choose your structure and leaders wisely.
2. Embed transparency throughout your governance model
Transparency is a critical component of achieving optimal results with a PSP. To drive maximum savings opportunities, the service provider needs real insight into the client’s culture, business requirements, forecasts, organization and constraints as much as the client needs a clear understanding of the service provider’s performance.
In an outsourcing engagement, the PSP’s responsibility is to understand how to meet the client’s buying requirements in the best possible way. To do this, the PSP needs a reasonable understanding of the key stakeholders’ personalities, the politics, and the organizational and business context to formulate RACI (Responsible, Accountable, Consulted and Informed) tables for each project, and to make and implement the best sourcing recommendations. On each sourcing project, some client stakeholders will be supporters, enablers and willing partners, and others will be passively aggressive or openly aggressive blockers.
Clearly, the client will need to always understand what the PSP is up to as it interacts with a broad cross section of the client company, and the quality of each interaction can enhance or damage the reputation and momentum of the overall program. Given the two-way nature of the relationship, the governance structure must be bidirectional — focusing equally on performance of the client organizations and the service provider.
3. Be the change
Successful procurement outsourcing is directly related to the organizational ability to enable change — specifically change away from less effective uses of each external spend dollar to more effective uses from the perspective of growing the business. Ultimately, effective procurement outsourcing management cannot achieve its potential without expert change management.
As such, the manager of the PSP relationship must help to create the environment for the PSP to be successful. This requires an understanding of how to motivate behaviors internally to help a wide variety of stakeholders to see possibilities and returns beyond the status quo, and how to utilize (but not overuse) executive program governance to assist in underscoring the importance of openness to new approaches when projects reach an impasse. Strong change management skills can be in short supply, and in many cases it can be wise to bring in external change management experts.
The specifics behind each of these three strategies need to be carefully aligned to the client’s corporate culture, and will accordingly vary from one organization to another. That being said, taking the time to get each of these steps right will yield benefits of millions of dollars in improved savings in typical large corporations. Millions of dollars, 1, 2, 3, just like that. Now get going.
About the Author:
Bill Huber, Managing Director with Alsbridge, held high-profile positions in procurement leadership at several major U.S. companies prior to his ongoing success on the consulting and advisory side of the business. Bill is a recognized thought leader and sought-after speaker at major industry events.
Theme: Procurement
