In this guest post, the second in a series, Procurement Leaders invites GEP’s Santosh Reddy to look at factors to consider when outsourcing procurement activities - particularly around understanding return on investment. You can download a whitepaper on the subject here.
In the previous post in this series, we presented why and how a company can evaluate if procurement outsourcing will help them. In this part, let’s look at some ideas on how to measure and generate return on investment (ROI) on a procurement outsourcing deal. While calculating ROI seems like simple math, quantifying the returns generated by an outsourcing deal is difficult.
All procurement outsourcing deals have two viable sources of return – cutting costs on transaction processing which is achieved soon after implementing the project, and savings through strategic sourcing and category management achieved during the course of the outsourcing contract.
To measure the short term return, start by defining all activities that will be outsourced and measuring the time and effort being expended by the current team performing those activities. The result should be a monetized value of time spent on transactional/ tactical activities being outsourced.
While lay-offs were a prominent result of outsourcing deals and meant to generate savings immediately, they are not the case or norm in procurement outsourcing deals. By redeploying current staff, companies are able to take up and complete more initiatives thanks to the additional time available with resources experienced with the job and knowledgeable of company’s culture and people. These long-term savings can be measured as the delta increase in savings from initiatives that this redeployed team achieves.
With a calculation mechanism in place, next step is to ensure the sources start yielding results. This can be achieved using a combination of steps.
Measure the right things, and frequently
Reports are an absolute need for any outsourcing program. They help measure the program’s health, and helps program managers identify risks and negative trends early on. However, not working with the right set of reports could do more harm than good.
The first report all program managers should use is the OTIF – On Time In Full – service report. By definition, it measures percentage activities completed within agreed time and meeting specified service expectations. The tricky part here is to define what ‘On Time’ means, particularly where the support requires constant interaction and waiting for updates between the support team, client and suppliers. The best laid programs typically account for this time and try to measure the client and supplier teams too.
For a transaction outsourcing program, the team’s utilization and efficiency can be measured purely on number of transactions processed. It is made possible because of transactions being fairly standard, define time per transaction and rest is pure math.
However, utilization is not a good measure by itself when measuring anything apart from a transaction support process. For programs that support category management, contract management or sourcing support, not every contract renewal or strategic sourcing initiative is similar to another one. The same project being re-executed might require a different amount of time and effort. So, additional reports should be used. Savings generated by sourcing support or contract management programs, and spend under procurement’s management in a category management program are good indicators of a program’s health.
Know the support team
Outsourcing teams can be a black box at times, with a small helpdesk team doing all the interaction with the client teams. While a helpdesk team is needed for a variety of reasons, one to one relationship between smaller teams within the service provider’s team aligned with client teams will be beneficial. This helps with fostering a healthy working relationship. Risks identified can be addressed quickly and impact is localized.
Utilization is to a good extent directly proportional to the strength of the pairing. This has multiple benefits to both parties involved. For clients, they are working with the same set of 2-3 members, so they never get that black box feeling even if they still have to go through a helpdesk for new projects. Because they have worked together in the past, support team does not have any learning curve about the client’s work style and requirements. From the service provider’s perspective, it will let their team specialize in a certain aspect rather than be a jack of all activities, and help them on their career progression and improved retention.
In summary, an evergreen change management and communication program, frequent and proper reporting and good pairing of teams can bring about early adoption and ROI realization. Program managers from both the client and service provider should focus on measuring and communicating the effectiveness of the outsourcing program.
Santosh Reddy is senior manager, Consulting, at GEP.
You can download a whitepaper ’Procurement Outsourcing: A Field Guide’ produced by Procurement Leaders in association with GEP, here.