The Natural Progression

An outsourced procurement function requires effective management to make it work. Nigel Herrington and Andrew Loken outline the relationship between a major company and its outsourced indirect spend team.

Many people may think that outsourcing part of their procurement function means taking a leap of faith with an unknown partner into unknown territory. But in the case of BG Group, a global natural gas business in the FTSE 20, contracting procurement specialists 4C Associates was a natural progression of an already existing consulting-based relationship. Active in more than 20 countries on five continents, BG Group operates four business segments: exploration and production; liquefied natural gas; transmission and distribution; and power generation. An integral part of their contracts and procurement function is their outsourcing partner's 'indirects team'.

Scope of service

BG's outsourcing partner provides a full procurement service through an onsite team of six people covering all indirect goods and services spend. The team takes full responsibility for the management and control of the provision of services in accordance with BG's procurement procedures, covering three main areas: category, activity and technology.

Category scope includes all indirect goods and services categories, including IT hardware, software, outsourced services, telecoms, marketing and advertising, facilities management, consultancy, recruiting, international contractors, legal, financial services, travel and HR services.

Activity scope covers overall management and responsibility for all aspects ofthe indirects team's purchasing activities, including project structuring, benchmarking, tender processes, contract implementation, knowledge share, spend analysis and reporting, procurement compliance and SAP order processing.

Finally, under technology scope, BG's partner provides a number of proprietary web-based tools to compliment the BG SAP system - online RFIs, RFPs, stakeholder evaluation tools, web-based spend analysis tools, service-provision evaluation tools, and hosted portal content for indirects purchasing as a communication tool for the indirect categories across BG Group.

Integrated team, distinct culture

It could be argued that this scope of services may be similar to those of an internal procurement department, supported by a technology team. However, the real differences and issues are related to how the onsite outsourced partner team works with both the rest of the internal procurement department and the wider internal client base within the organisation. Are they respected by the internal procurement department and the wider business community? And do the outsource team feel like they are employees of their own company?

Another question is whether the team is working in a way that is aligned to the internal procurement department's objectives. Whether the outsource team is introducing new capabilities by leveraging the outsource company's knowledge and expertise should also be considered. The key is to ensure that the working relationship is based on clearly defined and agreed principals.

A major challenge in any outsourced service is to find the right balance between being a part of the client organisation while maintaining the outsourced company's own culture. The team needs to feel that they belong to their own company, while being fully accepted in the client organisation. In BG's case, this has been achieved by carrying out a series of simple, but effective, activities.

For example, BG have joint business cards with their partner. The double-sided cards clearly communicate that the two teams are integrated but distinct. The newly created Group Procurement Indirects brand is communicated on everything from presentations and email signatures to web portal content, both internally and externally. The brand consistency is in line with the BG corporate branding, but differentiates the team.

Monthly team meetings and period away days for the outsourced team personnel, as well as regular bulletins to client teams, ensure the onsite team feels a part oftheir own company. At the same time, the team is included in the wider BG contracts and procurement meetings and forums. This ensures that the 4C team are an integrated part of the wider BG contracts and procurement department.

Flexible resource levels are maintained, based on workloads and specific areas of expertise required. This allows fresh minds to join the team, helping to create a dynamic and knowledge-sharing environment.

Aligned incentives, reduced management time

Another key issue is to ensure that the outsource team are supporting the delivery of the BG contracts and procurement department's objectives. This can be achieved by using quarterly service-performance metrics that are tightly aligned with BG's overall objectives, and that are linked to a service-delivery bonus. The metrics cover a combination of service-level, cost-saving and other non-cost benefits. The relative importance of each metric can be agreed each quarter for the following quarter, which means that the whole team can quickly change its focus if required.

An inherent characteristic of indirect spend is that there are a number of different categories, each with their unique supply structure, industry and economic characteristics. As a non-core area for BG, there is a risk that significant procurement management resource is dedicated to it, for a relatively small amount of spend. As an onsite outsourced service, this area requires much less management time dedicated, and frees up BG management resource to focus on the core strategic oil and gas directs categories.

Consultancy, relationship-based service

A key BG objective is to raise the profile of the contracts and procurement department within the business, and to expand its influence across the global asset base. The outsourced team can develop their own ways of working, based on principles that enable them to act more like internal consultants. The on site team can act as the connection point between the outsourced partner's total resource and expertise and the client organisation's needs, and can flex the resource and expertise on an as-needed basis. So the onsite team is managing relationships both internally, with key internal clients, and externally, with key suppliers.

By transitioning from an existing relationship into an outsourced service, some of the traditional barriers to success - trust, working style and culture - can be significantly reduced. Although aligning the working practices of two organisations while maintaining their independence is not an easy balance to strike, by applying good procurement principles to the deal itself, the move to a long-term outsourced relationship can feel more like a closely aligned supplier relationship than a leap of faith.

Nigel Herrington is head of group procurement, BG Group.  Andrew Loken is director of outsourced procurement services, 4C Associates