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In this guest post, Procurement Leaders invites GEP’s Santosh Reddy to look at factors to consider when outsourcing procurement activities. You can download a whitepaper on the subject here.
Procurement outsourcing is picking up pace. Everest Group recently reported that spend under management will stand at between $270bn to $275bn in 2014, an increase of 7% from 2013.
Most companies evaluating procurement outsourcing focus on selecting the right partner. They look to partner with a business that fits in with their culture, meets the right price and has the best blend of resources and capabilities. But two aspects of an evaluation tend to slip into the gaps:
We will address the second part of this in my next blog.
Choosing the right path
When looking at the viability of outsourcing procurement operations, most companies limit their scope of review to tail spend or low spend items. This is partly due to misconceptions that an in-house procurement organisation is better equipped to manage direct categories and high spend indirect categories, and that not many procurement outsourcing companies support multiple categories and they might not know the technology in use to support end-to-end sourcing processes.
These misconceptions are fuelled by evaluations that fall short on one capability or another. As much as you may want a company which checks off on every point, preparing the right checklist is more important than having an overly long list in the first place.
The best place to start with evaluation is defining objectives and being specific about them. ’Save $100m’ does not come close to ’save $100m in three years from X, Y or Z categories in Europe and North America through these initiatives’.
While the objective does not spell out the initiatives, it ultimately defines the direction and end goal.
The next step is evaluating scope in conjunction with the final targets. A typical procure-to-pay (P2P) outsourcing project leverages lower processing costs and improved efficiency. While this offers a strong ROI, it does not add up to significant absolute dollar savings. Sourcing, category management, supplier relationship management and inventory optimisation initiatives on the other hand can add significant value to the bottom line.
After carrying out the evaluation comes the time to make the first of many decisions: does it make sense to outsource or should investment be made on internal people and processes? These are some elements that will shape any decisions.
Existing procurement processes: Prepare a small list of B and C-class items and ask this question: If someone needs this item, do they know what to do to get it? If there are instances of ’buy and expense’, then there is still scope for the procurement process to mature further. However, if it is as simple as raising a requisition or purchase order, then there is a process in place. And if it is supported by a procurement policy and framework, then there is a robust process in place.
A robust process makes an ideal candidate for automation, and outsourcing can be limited to technology support.
Proficiency: A team’s proficiency makes a huge difference to a programme’s success. A team that is lacking in proficiency is a cause for concern, irrespective of the decision made. A moderately proficient team can pull a lot of weight but might lack the knowledge of trends and industry best practices to take on strategic initiatives. This is where a service provider with a knack for consulting services can really add value.
Current spend under management: Spend under management is at times a misleading concept. Spend should not be considered ’managed’ if procurement is not involved in the process right from the beginning through to the end. To help your evaluation, compare spend under contracts that the procurement team helped establish against two numbers: total spend under contract and total overall spend.
Procurement’s influence within the company: The above parameters feed into evaluating this part. There could be instances where the best process and people supported by the right technology might still not be successful in earning procurement a seat at the table. This could be for many reasons but a consulting company can help through a combination of efficient spend analysis, market research, thought leadership and change management.
Evaluating a company’s maturity on these parameters will help not only validate whether a procurement outsourcing firm will benefit it, it will help assess what type of services it can benefit from.
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.