Procurement Outsourcing Roundtable: How fast, how far?

Procurement outsourcing – how much and when – is a key topic for professionals. At the latest ELP roundtable, senior executives from companies across Europe gathered to air some of the issues involved.

Outsourcing is top of the agenda for many businesses, but it is surrounded by questions. With huge amounts of investment in time and money and an enormous amount at stake in the event of success or failure, it is not surprising that the question “should we do it?” is, it seems, on many people's lips. More crucially, it emerged at the latest ELP roundtable held in London, is the question which was raised by more than one participant: “how far should we go?”. A cartoon flashed up on the screen by facilitator Christopher Barrat was used to illustrate this dilemma. An executive sits in an empty office completely devoid of activity. “What do you say we should start insourcing again?” he asks his colleague.

Few companies would consider going anywhere as far as this fictional example, although something similar is not unknown: Dell, for example, outsourced more or less all its operations, leaving it to act as an organising force at the centre, with the management of a brand and a network of third-party providers as its core area of activity.

The potential benefits of outsourcing procurement are clear enough. It can mean reducing headcount and cutting costs. It can even be, as participants in the roundtable heard, an effective way of sorting out complex problems with systems and processes.

Barrat suggested the key to successful outsourcing lies in the preparation: the “pre-launch work” which will determine the effectiveness of the project.

In an increasingly competitive and globalised environment, the stakes involved in outsourcing are seemingly becoming bigger all the time. Added to the traditional risks – economic, business and quality – are a whole new set relevant to today's changing conditions. Corporations operating in the global village now face substantial political risks as tensions throughout the world threaten transport systems, borders and physical assets. There are also personal risks to consider: with the advent of Sarbanes Oxley, executives doing business on the world stage must be more aware than ever of the need for the highest ethical standards.

Finally, ethical risks are ever-present, especially for those companies and organisations doing business in developing countries. A decision to outsource procurement must take the potential dangers of handing over ethical responsibility to a third-party fully into account.

For participants at the roundtable, one of the key concerns was which parts of the purchase-to-pay cycle would lend themselves best to outsourcing.

In the first case study presentation, Peter Pick, vice-president, NPI supply management Europe, Unilever, argued that strategic sourcing was a key benefit driver for outsourcing providers and should always be included in the package.

Unilever has carried out a range of outsourcing projects including finance in North America, Europe and Asia AMET regions, along with HR and trademark services on a global scale. Procurement of non-production items (NPI) was outsourced in North America 16 months ago, while purchase of global IT was outsourced last year. NPI is currently being outsourced in selected countries in the Asia AMET region.

Most of these outsourcing initiatives were taken after the launch of the One Unilever programme, which aims to deliver better value to shareholders through the process of simplifying Unilever's organisation.

As one of the world's biggest companies operating in over 100 countries, with 206,000 employees and a turnover last year of almost Euros 40 billion, NPI outsourcing is an important area for the foods, home care and personal care products manufacturer.

Pick sparked intense discussion at the ELP roundtable with a detailed account of his experience in outsourcing. Reasons for considering outsourcing procurement of NPI included the fact that Unilever would gain significant benefits from leveraging its scale and adopting a global approach. There was a need for more consistent and more efficient procurement processes across Unilever, he said, with many NPI goods being acquired directly by end users.

Likewise, he said there was a need to increase spend data transparency to facilitate the delivery of sourcing savings and buying performance. The relationship with a global service provider will bring process simplification for Unilever and simplifies, for example, the already outsourced accounts payable process.

Further, the number of NPI suppliers worldwide was unknown, and not enough spending was under the control of supply management. Pick explained that certain areas of the purchase-to-pay cycle had been deemed to be in-scope for management by a third-party while others had been ruled out.

In-scope was the full procurement process, including strategic sourcing for most expense areas and supplier enablement, while supplier requisition and contract execution were Unilever's responsibility.

The outsourcing decision should be considered as one tool in the company’s sourcing strategy. It should be addressed selectively, service by service. For each contract it is fundamental to match the potential bene. ts of the outsourcer – volume and scale, negotiating power and expert know-how – and the company’s requirements and expectations for the future. Facilitators include clear objectives, measurable indicators, a balanced reward model and the ability to incorporate change. The scope and timeframe of the outsourcing contract should not compromise the competitive and efficient environment that all companies must create and maintain in their supplier base. CÉSAR GUNDERSEN PESTANA MEMBER OF BOARD, PORTUGAL TELECOM COMPRAS

"I am a staunch advocate of the view that procurement cannot be outsourced but I absolutely agree that this is based on my definition of procurement which is the strategic side including supplier selection. The mechanics of procurement such as order generation and P2P type activities can be outsourced effectively providing the necessary controls are in place. It is not always apparent that we really understand the overall process and sometimes we are in danger of trying to outsource something we don’t understand ourselves, which is a recipe for disaster." CHRIS JONES DIRECTOR OF PROCUREMENT, EDF ENERGY

"I would be very careful to recommend full outsourcing. Go for selective outsourcing of appropriate parts of procurement which is non-core and try to fix the rest by yourself. In the IT industry there are plenty of failures when it comes to full outsourcing. The learning experience in the second wave of outsourcing has been to be more selective about what you outsource and work more with your retained organisation and processes. There are opportunities for outsourcing in procurement. But learn from the mistakes of the IT industry and go directly for selective outsourcing." SVEN-ANDERS STEGARE CPO, SEB GROUP

Order management and the final stage, management reporting, were to be managed by the outsourcer, while delivery confirmation would be Unilever's responsibility. Invoice processing was already run by a third-party in one region.

Key drivers for outsourcing procurement included delivering savings, reaching a higher compliance level among users and providing a route to more robust processes. Further, outsourcing procurement would create the way for a “paradigm shift” in buying behaviour at Unilever. It would provide a catalyst for bringing NPI spend under supply management control and support the company's One Unilever model with a simplified organisational framework.

Debate among roundtable participants centred around Unilever's decisions over which parts of the procurement process could reasonably be handed over to third-party providers based on current capabilities. “The most difficult individual decision was whether to keep strategic sourcing in-house or not,” Pick said.

Discussion with internal customers, Pick said, was often provoked by anxiety over who would decide which suppliers to contract.

“We retain full control of supplier selection,” he said. “The general fear about outsourcing is - will IBM decide which lawyer I should use in the future?' The answer at Unilever is - you will retain that decision'.”

The long-term vision, Pick explained, was to maximise leverage and spend control. He was asked how savings created through outsourcing were defined. This was on a price-for-price basis, he explained. “Initially, we had long discussions about this. At the end we went for a very simple approach: price versus price – what we paid this year compared with what we paid last year. The main message is you need to create a robust source-to-pay process which creates spend transparency. You also need strong contract management processes.”

Annual savings targets for the NPI outsourcing projects had been met or exceeded, and spend visibility was improving rapidly, although higher process adoption rates were still needed.

Asked by one participant if he had any regrets over any of the procurement outsourcing projects, Pick replied: “Not yet”.

Nima Motazed, CPO at Erste Bank, presented a case study describing the creation of a new arms-length company which took control of a large part of the procure-to-pay cycle. But he was adamant that strategic sourcing would not be part of the outsourcing arrangement.

He recounted how procurement had initially concentrated on delivering savings and had produced good results in the first six months. But in 2005 he realised there was little transparency in the process and, further, there were no fewer than 29 systems to handle. “I decided it would be much easier to outsource it,” Motazed told the roundtable. “It might not be perfect but it would certainly be better than what we had.”

This happened last year when Erste Bank, Austria's second largest banking group and one of the leading financial services providers in central and eastern Europe, signed a 10-year outsourcing agreement with Accenture.

The deal, part of the bank's strategy of focusing on its core competencies, meant Accenture would manage all procure-to-pay functions including order processing, payables and procurement contract management.

The new company, Proserve, is part owned by the bank but run separately with a board chaired by Motazed. Taking procurement services out to the market was a logical development, he said. “At some point your savings in your organisation are going to go flat, so then you can offer your services to other people. You can't do this if you are a department at the bank, so your strategy is to become a commercial operation in the market.”

Roundtable participants were clearly interested in how such an arrangement worked in practice. “What makes you think you can compete against the likes of IBM and Accenture?” one asked. Motazed replied that Proserve was concentrating on its own business and not going out looking for big clients. “If Accenture can offer a better service and price, so be it,” he said.

The question of why outsourcing procurement might be beneficial was covered in the course of the discussion, even if the more fundamental question of why a company might want to outsource in the first place was only briefly raised.

The main benefit, according to Robin Shahani who leads Supply Chain Advisory Services at consultants EquaTerra was clear. “Financial value on a discounted cash flow basis is the driver,” he said. “How can I get the greatest savings possible as quickly as possible? An aggressive plan to strike and implement deals that make sense, supported by processes and tools to drive as much compliance as possible.”

Shahani warned that ruling out some parts of the procurement process for outsourcing could prove counterproductive. For instance, you might lose value if you “start to carve out the bits that are organisationally hard to do,” he said.

Chris Jones director of procurement at EDF Energy, echoed the warning. “One of the biggest mistakes I can think of is to take a part of the process and optimise it, but then it turns into a disaster if you don't know how it fits into the larger business process. It's very dangerous to select specific activities to outsource unless you know what they are part of.”

Also high on the list of potential benefits was the ability to access best procurement practice and the best quality people available. The question of why big outsourcers were seemingly able to attract more capable procurement professionals than companies was raised.

The answer emerged that the service providers are specialists and thus offer wide experience and good career prospects to ambitious professionals.

Several roundtable participants pointed out that procurement outsourcing is a relatively immature market with few really big players. This means real competition in the marketplace is limited and that in turn means some businesses may be apprehensive about taking such a step.

Concerns were also raised that some of the big outsourcing players may be still learning about procurement themselves, and that they regard procurement outsourcing as an add-on to their existing consultancy activities.

However, market experience suggests that with clear understanding of the market reality and by adopting a well thought-out stance, the lack of competition need not be a major problem. And the relative lack of longestablished procurement outsourcing specialists in the marketplace means there is plenty of room for new players to enter the market.

The immaturity of the marketplace also raises questions about how best to approach the tendering process when looking for a partner.

Normal RFX processes can be very expensive and time consuming, Rob Lees, head of UK supply chain at Vodafone, warned the roundtable. Shahani agreed: “You can waste a lot of time and money going to ten providers with very different offerings when there are only two or three who could provide you with a solution that meets your particular needs.”

PROCUREMENT OUTSOURCING: KEY POINTS AT A GLANCE Procurement outsourcing is an immature market with few really big players. Saving money is the main benefit of outsourcing procurement. Savings can be achieved through marketplace leverage, transparency of spend and increased compliance. It can help solve the problem of finding excellent purchasing people. Technology is not the key success driver – people and processes are. Go with an already proven system. Make sure all technical issues are addressed at the start. Get users from both sides involved early. Adopt a holistic approach There is no template for best practice yet. Exit and lock-in issues with existing suppliers should be addressed to give flexibility. The set-up process should be robust but not confrontational. Avoid lengthy RFP processes if in reality not many will go through to the final stages.

The general view seemed to be that there is no problem necessarily in working collaboratively with a small number of suppliers – possibly just one – in arriving at a mutually beneficial deal.

"There would seem to be an inherent additional cost to us in taking on a further system for the outsource, perhaps explaining why familiar faces from the IT world are active in this sector. We face the opportunity of extending procurement’s reach, and don’t want to dilute or duplicate the effectiveness of our own systems and processes. In our environment we would be far more likely to engage a team of procurement specialists and bring them into our own process and systems environment. The CPO needing to extend his spend coverage would then have a choice between many more potential partners, or even building a mixed programme team of internal and external resources." ROB LEES - HEAD OF UK SUPPLY CHAIN, VODAFONE

"Companies first need to understand the relationship they want with third parties and consider how important it is to keep commercial intellectual capital in-house. Second, they need to assess whether they can dedicate appropriate resources – people and technology – to truly exploit and manage the whole end-to-end budget-to-sourcing-to-order-to-pay process. Identifying gaps in the process and considering other factors such as scope, scale, physical location, cultural attitude to control and governance, compliance and so on will identify the necessary drivers for outsourcing. Once drivers are clear then a rigorous sourcing process should be followed to identify various options which satisfy the drivers. Like every decision, it is not about whether it is right or wrong but much more whether it is right for you." ANDREW SAYERS HEAD OF PROCUREMENT, ABBEY

"Procurement outsourcing is no different from other outsourcing decisions, in that the business needs to be clear about why it is considering it as an option and what the alternatives are. Then it needs to prepare a robust business case for the selected option. Fuzzy thinking or the “flavour of the month” as rationales should not be an option. Procurement and the business should consider using a specialist outsourcing advisory company when reviewing their procurement outsourcing options and strategy to help ensure a robust decision-making process has been followed. " COLIN DAVIES SENIOR DIRECTOR INTERNATIONAL PROCUREMENT, PFIZER GLOBAL RESEARCH AND DEVELOPMENT

Once a partner has been selected, the question of how to handle the relationship arises. A flexible approach appeared to be most favoured.

Ian Ferguson, a partner at law firm Allen & Overy warned: “If you screw the supplier down hard they will work to the contract.

“Make sure you have a mechanism in place for dealing with differences of opinion so that the relationship can be managed in a non-adversarial way.”

Clarity appears to be the watchword when it comes to the success or otherwise of outsourcing projects. The processes and terms of the relationship must be transparent. As Pick said: “The main message is that you need to create a robust sourcing-to-pay process which creates spend transparency. It is also crucial to make sure you have strong contract management processes.”

Many people will have experience of outsourcing as consumers – we are all familiar with outsourced call centres, for example. Here, reducing headcount – workforce arbitrage – may be a key driver.

Outsourcing labour could mean, however, that you may spend more per full-time equivalent than keeping people in-house. One roundtable participant said outsourcing meant it was employing the same people as previously but was paying big consultancy prices for them.

Great purchasing people are hard to find, particularly in the indirect spend area, participants heard, but it may be possible for outsourcing providers to attract high quality professionals.

The increased benefits of leverage and control gained through outsourcing procurement figured large in the roundtable discussions.

Some businesses may already think they have budget control because they know what has been spent and they have reasonable audit processes. But it was suggested the control which outsourcing procurement provides is likely to be far earlier in the cycle.

Money can be saved through leverage in the marketplace, transparency of spend and increased compliance. The question of how to measure savings is problematic, but roundtable participants appeared to agree that simplicity – price versus price – is critical. 

Reflecting an increasingly recognised tenet in business generally as well as in the area of procurement outsourcing, it seems widely understood that outsourcing is not about technology. The point seemed to gain general agreement at the roundtable. Little if any discussion centred on the technological solutions available.

Technology, it seems to be universally acknowledged now, is simply an enabler. Effective delivery is the key: what you do makes the real difference, not which software package you use to do it.

That is not to say that pure technology issues do not need to be addressed. But they are not the key drivers of success. This will be achieved through excellent people and processes.

Gianni Giacomelli, Head of Global Strategy and Marketing for SAP's BPO Business Unit, agreed: “Technology, itself, is just an enabler. It is, however, important to consider carefully the functionality, flexibility, and implementability of the various tools which are available in the marketplace today.”

On the question of what kind of system to go for, the best advice seems to be to opt for one which is already road-tested and proven. And it is crucial to ensure all technical issues are as standard as possible to reduce cost and help smooth implementation and management.

It is also essential to ensure all the issues surrounding the handover and the ultimate exit from the deal are addressed at the start.

However, the bespoke/off-the-shelf issue remains problematic. The consensus is probably on the side of the non-bespoke option, but at the same time making sure all the amendments and upgrades the system has undergone while being developed with other companies have been incorporated properly into your version.

The roundtable agreed that getting real users from both sides involved early is critical to a successful procurement outsourcing.

A holistic approach to ensuring the whole process and system fit together is the recommended option. The biggest benefits of procurement outsourcing are likely to be at an aggregated level, rather than in individual business units.

Procurement outsourcing, it seems, can succeed even if more core areas such as strategic sourcing are left out. Speakers at the roundtable demonstrated there is no fixed template for success.

Any outsourcing is by its nature a partnership, so both sides need to be fully aware of the complexities involved. In particular, the outsourcing organisation should ensure it is in control of the relationship.

While the setting-up process should be robust, with both sides wanting to make sure they have a deal that will work for them, a confrontational approach can lead to failure.

If the outsourcing package is significant or specialised there is likely to be a very limited choice of supplier. This means it is probably best to avoid lengthy RFP processes if, in reality, not many will proceed to the final stages.

It is particularly important to ensure that the outsourcing contract includes well thought-out and clear strategies for ending the relationship if that should prove necessary.

One participant recounted how it had taken his company three years to extricate itself from an unsuccessful IT outsourcing deal. Shahani, however, suggested this may be simpler than at first thought. “There are more ways to terminate these agreements than you can imagine,” he said.

Outsourcing procurement remains high on the agenda, judging by the discussion at the ELP roundtable. But a cautious and critical approach is recommended, in which each part of the procurement process is considered on its own merits.

“When it comes to strategic sourcing,” Heather Rodgers, head of general procurement and supplier management at Centrica, said, “I wouldn't rush into it. You might be giving away your crown jewels.”