Choosing Procurement Outsourcing For the Wrong Reason
Procurement outsourcing -- a topic which every year seems to make prediction lists and analyst reports suggesting that its time is about to come -- is quietly managing to stay in the headlines. And not just in the procurement trade press or blog headlines, mind you. Global Services, an outsourcing- and services-focused trade rag, recently ran an article headlining that procurement outsourcing can save companies 5 to 10 percent from outsourcing indirect procurement. The rest of the piece features an interview with Thomas Baker, Executive VP and CPO at First Horizon National, a financial services company, about their decision to outsource procurement to Accenture.
According to Baker, "In the past our spend has been spread out all over the company, and has not been particularly well managed from top down. We have too many service providers in some categories, lots of different pricing, in some spends we have the same service providers with different discounts -- all this happens when procurement is not centralized. That is the rationale for it." Personally, I don’t believe that outsourcing and centralization should be related factors. Perhaps First Horizon was not being entirely candid in their rationale for the decision. I'm guessing a lack of internal skills to hit such aggressive overall savings targets were a major issue.
But what is more interesting to me is how they plan to focus on strategic sourcing first before implementing automated P-to-P processes and technology. The interview notes that the first wave of the outsourcing agreement includes sourcing related work in such "categories as consulting, temporary employment, shipping/courier, advertising, general voice and data, furniture, office supply, etc. There are about 20 different categories in the first three waves. The waves are broken down by where we think the biggest opportunities are and where the contract expirations are ... We did this a little differently as we were concerned about getting some good results upfront — we started some sourcing activity at the initial stages rather than implementing the automated processes first ... we will not begin the installation of the software for the automated system until mid year."
For other companies thinking about procurement outsourcing, this might be a good lesson in how to get started. But I hope that no one confuses the need for greater centralization with the need to outsource. If outsourcing is the logical outgrowth of a centralized approach or strategy, that's one thing. But in my view, it's an admonition of management failure to jump to outsourcing simply because centralization has not taken hold organically.
- Jason Busch
According to Baker, "In the past our spend has been spread out all over the company, and has not been particularly well managed from top down. We have too many service providers in some categories, lots of different pricing, in some spends we have the same service providers with different discounts -- all this happens when procurement is not centralized. That is the rationale for it." Personally, I don’t believe that outsourcing and centralization should be related factors. Perhaps First Horizon was not being entirely candid in their rationale for the decision. I'm guessing a lack of internal skills to hit such aggressive overall savings targets were a major issue.
But what is more interesting to me is how they plan to focus on strategic sourcing first before implementing automated P-to-P processes and technology. The interview notes that the first wave of the outsourcing agreement includes sourcing related work in such "categories as consulting, temporary employment, shipping/courier, advertising, general voice and data, furniture, office supply, etc. There are about 20 different categories in the first three waves. The waves are broken down by where we think the biggest opportunities are and where the contract expirations are ... We did this a little differently as we were concerned about getting some good results upfront — we started some sourcing activity at the initial stages rather than implementing the automated processes first ... we will not begin the installation of the software for the automated system until mid year."
For other companies thinking about procurement outsourcing, this might be a good lesson in how to get started. But I hope that no one confuses the need for greater centralization with the need to outsource. If outsourcing is the logical outgrowth of a centralized approach or strategy, that's one thing. But in my view, it's an admonition of management failure to jump to outsourcing simply because centralization has not taken hold organically.
- Jason Busch
1) An outsourcer guarantees savings. Management writes one check to the outsourcer, it's less than the check they're currently writing, done deal.
2) It's hard to drive internal change. By moving the whole problem to an outsourcer (who may or may not retain internal resources), the pain is avoided.
3) An outsourcer will bring in e-sourcing technology solutions and implement them as part of its cost guarantee, so the pain of the implementation is theirs.
4) Supplier blowback, sometimes to senior level management, can be deflected to the outsourcer -- "sorry, you'll have to talk to [THEM]."
5) Financing. As part of the outsourcing deal, there's a finance deal buried inside of it, for equipment, or software, or services, or whatever.
It's very difficult to negotiate a good deal with an outsourcer if you don't already have a very good idea of the savings that should be achievable. For example:
o If the outsourcer simply replaces manual processing of invoices with lower-cost personnel, and that's the source of the "savings," there is a hard limit to the amount of savings that can be achieved. If invoices are expensive to process, then why not implement a pcard program and get rid of 90% of them? In fact, if you're already in an outsourcing situation where invoice processing is charged on a per-invoice basis, pcard is an excellent way to reduce those charges.
o If you haven't done a spend analysis and/or run an auction or two on a category, how do you really know what savings can be achieved? It isn't hard or expensive to do either of those things, if you pick a low-cost but quality e-sourcing vendor; and neither the spend analysis nor the auction need be disruptive.
o If you haven't benchmarked supplier performance against contract terms, and against industry data, you really don't have any idea of whether you're getting the terms and prices that you ought to be getting. This is free money, some of it recoverable -- why give it to the outsourcer?
The list goes on and on, and this response is already too long -- perhaps we need a guest commentator (not me; I'm not an expert on outsourcing by any means) to write a more comprehensive piece.