Who Will Source The Sourcer?

Today’s guest blog on procurement outsourcing comes from Bill Huber, Director, TPI.

Procurement outsourcing is positioned to drive some of the most dramatic bottom-line benefits to corporations. Yet of all forms of sourcing, it is broadly misunderstood by both procurement and outsourcing practitioners and has achieved a slow rate of adoption.

Recent research by the Aberdeen Group (sponsored by TPI), Procurement Outsourcing: A Strategic Imperative, showed the top four reasons for not outsourcing procurement:

• Procurement a core competency: 44 percent
• Prior investment in procurement applications: 43 percent
• Unclear benefits/value of outsourcing: 38 percent
• Perceived loss of control: 29 percent

As a former Chief Procurement Officer (CPO) for a very large company, these four reasons have aligned with my thinking at various times in my career.

Originally, I was committed to the following premise: a company’s ability to transact efficiently and effectively is absolutely a core competency which differentiates the agile from the maladaptive. So, if my company were to outsource procurement, wouldn’t we be giving up this competency? Who will source the sourcer?

After continuing to sty the trend and speaking with very intelligent peers at other companies, I came to three realizations.

The first: Developing strategic relationships, determining contract and decision-making standards, and establishing a risk management and governance framework are all strategic activities. Managing transaction processing is not. The sourcing of desktop computers, office supplies or airport transportation is commodity focused and stimulates operational efficiency and cost-savings only. The bottom line: Best practice procurement is about understanding strategy and acting accordingly.

The second: With prior investment in procurement applications, it is normal to migrate application investments to a third-party outsourcing provider. It is a matter of a business case. But procurement managers tend to be very conservative regarding spending and maximizing investment value. An occasional write-off and migration to a model with a better business case is without a doubt the role of a good manager.

The third: Unclear benefits and loss of control are a function of education and analysis. A well-structured outsourcing transaction will always have a clear business case and structure. The issue is that companies do not have sufficient resources to focus on sourcing strategy and execution, risking the loss of control throughout the life of an engagement.

Many outsourcing experts do not understand procurement and see its efficiency play around transaction costs, similar to finance and accounting. At most companies the potential cost savings from a pure transaction efficiency perspective is comparatively unexciting. This is why procurement outsourcing needs to be considered holistically.

The benefits of procurement outsourcing come through long-term business relationships, not via transactional burdens associated with a purchase. What drives millions to the bottom line is mature transaction efficiency, market intelligence, category sourcing and higher spend compliance. Procurement Knowledge Process Outsourcing (KPO) is one example, enabling companies to perform market and risk analytics quickly and cost effectively, supporting the strategic capabilities of the agile CPO.

Avoiding outsourcing can become an impediment to achieving set objectives, both from a cost and a change management perspective. Had I come to this realization earlier on, I would have been left with a larger chunk of my budget for more strategic-minded talent. But looking ahead, the future for procurement depends on the use of strategic outsourcing to its advantage.

From your perspective, what do you see as the future for procurement? How can companies use strategic outsourcing to their advantage?

 

Comments

[Tim Cummins]

Bill,
I strongly support your observations and would add the following:

1. As you correctly observe, the focus on transactional savings is a diversion from the real 'pots of gold' and also prevents having the investment dollars to attract and pay the highly talented resources that could truly make procurement strategic.
2. While you allude to this point, it is clear that today's functional leadership is often the constraint. There is no real evidence that most are ready to think outside the box and to transform their function's role and value. Maybe it is age, maybe it is vision, maybe it is fear, maybe it is being stuck in conventional perceptions of power and authority .... what ever the reason, too many of today's CPOs are not serving their staff or their company especially well. That is why a) dissatisfaction with functional leadership is #2 in the 'things I dislike about my job' (IACCM 2007 talent survey; and 2) for all the huffing and puffing, Procurement is still not generally seen as a key strategic player - there is a gap between wishful thinking and reality.

In my experience, the best way to be viewed as strategic is to try to eliminate your job; it leads you to all sorts of unexpected values. And what better way to start that eleimination than to outsource - either literally, or by empowering those who you have for years frustrated with your controls!

[bill.huber@tpi.net]

Tim,
I could not agree more. The first step, it seems, will be more education on this topic within the procurement community.