Friday Rant -- Procurement Outsourcing: Fersht's Anemic Sourcing Horse? (Part 1)

In his new study, Seeking the New Normal in Outsourcing Delivery, Phil managed to get 1,055 outsourcing executives across customers/service providers and advisors to share their views on outsourcing and their intentions for 2010. In this rant, I'll share some of what he found, and offer up my own perspective on the situation. In Part 2, next week, I'll offer a no-holds-barred prescription for curing what holds back procurement BPO today (and how providers are just as guilty as companies when it comes to getting the sourcing/purchasing/payables outsourcing equation right).

According to Phil, "Procurement BPO is showing signs of lagging other BPO areas such as finance and HR. While a strong number of organizations (10%) will look to move into procurement BPO engagements for the first time in 2010, only a quarter will be 'layering on' additional scope (compared with 50% or orgs which have outsourcing IT or finance/accounting processes). This indicates that service providers are struggling to convince clients to outsource more than standard, tactical P2P processes and move up the value chain to evaluate strategic sourcing processes." Moreover, Phil argues that there's a "Lack of technology integration with procurement BPO engagements."

Here, Phil notes that "80% of all current procurement BPO engagements are focused primarily on service providers providing staff and rebadging customer employees to deliver process work, with no enablement of the underpinning supply management technology. While this can deliver some short-term savings to the customer through lower-cost labor, it's challenging to transform a global process effectively without tying it to the underlying technology workflow. If the customer persists in a process-only global operating model, the chances are resulting inefficiencies [from the management of] remote staff will eradicate these initial savings over time. Moreover, the service provider will struggle to develop delivery models it can use across multiple clients if it fails to develop its own technology-enabled supply management workflows. Like all types of people-centric BPO activities, if one service provider is only making money providing cheap labor, another will eventually come along and undercut the price even further."

What I find particularly interesting about Phil's observations is that if you listen to the marketing and positioning rhetoric of most of the providers, offshore-centric activities rarely factor into their main value proposition (other than supporting global and regional sourcing initiatives). Sure, cheaper labor for transactional activities is often the elephant in the closet, but it's one that is rarely let out, at least in initial discussions (especially since just about every provider's elephant looks the same: young, somewhat untrained, and prone to higher turnover, lower efficiency/effectiveness, and greater performance risk than the onshore or shared-services models that it's vying to trample).

In other words, we still have a major disconnect between the reality of procurement BPO and the way providers position their capabilities today. While many providers play the expertise, sourcing, and process-improvement card, most fall back on labor migration as a key component of value delivery (at least, if you believe Phil's survey). Now, perhaps this finding was skewed a bit by having offshore providers in the survey vs. pure-play specialists who don't offer multi-tower outsourcing capabilities. Still, the findings point to a need to redefine how we think about procurement BPO in its entirety. Might Capgemini's IBX acquisition contribute to how the market looks at and defines procurement BPO -- and what customers begin to expect from providers? I certainly hope so.

Next Friday, I'll continue this rant with a manifesto on what procurement BPO must become. And in the coming months, look for Phil and I to collaborate as we embark on a research initiative to interview and survey procurement BPO customers about their experiences with particular providers.

- Jason Busch