Consider the Source

Top 5 Actions to Heighten the Strategic Impact of Your Procurement Organization

By Bill Huber, Director, CPO Services, TPI

During tough economic times, procurement is often called upon to “win” price and payment term concessions from suppliers and service providers in order to boost the bottom line. While there is no question that part of procurement’s role is to ensure that a company is paying the best price, the “blunt instrument” approach tends to simply focus on supplier profit margins without doing anything to improve quality or drive innovation that ultimately, permanently removes real costs from the supply chain. 

                                                                                              

Here are five actions that you can take to raise the strategic impact of your procurement organization.

1. Define the target role for your procurement organization. Review your department objectives and formalize the role and results that you would like procurement to achieve for your company during tough economic times. Set strategic objectives in terms of innovation, quality, cost savings and customer service that the procurement organization will embrace as a response to recessionary times, and measure your progress toward those goals.

2. Segment your supply base. A formal tiering of your supply base, with best-practice supplier management processes for the top tier, can have a dramatic effect on the value that you derive from your most important suppliers. Set frequencies for reporting, monitoring, collaboration and financial reviews with each, and require that your most strategic suppliers bring a certain number of innovation suggestions to the table each period. Set a formal process whereby these suggestions will be vetted, with the best ideas submitted for review by an executive-level procurement governance team.

3. Realign your resources. Identify underutilized or misaligned resources, and shift roles to focus talent on your greatest areas of opportunity. Often individuals who have been focused on a particular commodity because of their expertise could bring a fresh perspective to other categories. People who make the greatest impact in their current areas can have an even greater effect on an entirely different category.   

4. Review processes and technology to identify roadblocks and underutilized capabilities. Processes can be slower and more cumbersome than they need to be. Stay on the lookout for procurement processes that were designed to address a past problem that is no longer relevant today. Also, organizations often have only partially deployed procurement technology solutions for lack of resources to support a more ambitious rollout. A second look can reveal underutilized technology that could be leveraged with a different support model to drive faster cost savings or improve visibility or user satisfaction.

5. Evaluate governance structures, and change if necessary. Good procurement governance should enable transparency and balanced decision making. In order for it to be effective, procurement governance must be designed to ensure that important decisions are made at the right level to balance risks with rewards, and to ensure a timely flow of information to the right levels of the organization.  

Implementation of these five actions could ultimately improve the effectiveness of your procurement organization by 3 to 5 percent or more, increasing your impact on the bottom line and transforming the role that procurement plays within your company.

TPI’s CPO Services experts can collaborate with you to assess your current procurement processes, then help you identify and implement strategies to improve quality, drive innovation and permanently remove real costs from the supply chain.

Contact us today to begin the dialogue.

Sourcing Strategy Drivers: ITO+BPO Synergy?

By Peter Allen, Partner & Managing Director, TPI

Is there significant value in ITO-BPO synergy?  Or, should you think about the transactional processing of a business operation distinct from the technology platforms and enabling tools?

This topic is especially important for sourcing strategies as companies look to gain benefits beyond wage arbitrage.  Much of the work moved to captive offshore operations and even offshore outsourcing is related to operations.  That is, outside of the realm of applications-related development and support tasks, BPO took the form of transaction processing. 

The underlying technologies used to do the work were managed separately.  Sometimes those technologies were managed internally and sometimes they were contracted to a different service provider.
There were many reasons for the delineation of responsibilities in this way, not the least of which was the fact that many of the leading offshore BPO-oriented providers weren’t the strongest players in providing managed services for infrastructure operations. Sure, many providers talk about remote infrastructure management, but that’s merely a wage arbitrage approach.

Other than a few of the multi-national providers that walked on both sides of the ITO/BPO line, the market simply didn’t have the maturity of capabilities to bring real synergy into play.

I think the times have changed materially, and this trend will accelerate.

Many of the providers are making significant investments in technology enablers for their BPO offerings.  They are helping to drive efficiency in the integration of technology and operations. This is a good thing!
Interestingly, it’s the BPO-oriented providers that are adding technology management capabilities, not the other way around.  Most of the ITO-oriented providers aren’t showing the ability to climb up the stack into BPO.

From the vantage of a sourcing strategy, finding the synergies – in costs, capabilities, and capacity – through integrated ITO/BPO depends on the business process at hand, and the existing landscape of internal/external delivery resources.  The answer steers the consideration of internal/external sourcing options and the candidacy of the providers. 

I believe that these synergy opportunities are more real today than ever before, but they vary by industry segment, process, and provider.  The best way to test it is to engage provider around end-to-end solutions as this could enable output based pricing and risk transfer to provider. 

It’s coming … but it’s not yet a take it to the bank proposition.

Sourcing Strategy Drivers: Fix Before Ship?

By Peter Allen, Partner & Managing Director, TPI

Previously, I brought up some common questions that arise in sourcing strategy (see: Sourcing Strategy Drivers: Three Big Questions). The first of which was, “Should you fix and ship or ship and fix?” This question related to the adequacy of a business process’ operation and whether that process should be remediated prior to altering its delivery model is important for many companies considering offshoring or outsourcing and has been frowned upon lately (see: Fix and Mix Approach to Outsourcing, Network World and 7 Sins of Offshore Outsourcing, Baseline).

In days past, I was a strong advocate for fix before ship.  It made little sense to hand a broken business process – whether it was a BPO function such as invoice processing, or an IT process such as server administration – over to a different service delivery model until it was running at an adequate level of performance.


Why?

The prevailing arguments were twofold.  First, in the era of “lift-and-shift” sourcing there was a tendency to merely sustain that broken process into the future.  One client coined the phrase “same mess for less.”  The means of contracting for transformation of a business process were inadequate and the industry simply working on the basis of achieving cost benefits by sustaining the status quo at a lower price of operation.

The second argument said that the client should harvest the “low hanging fruit” of benefits prior to giving  the opportunity to a third party. 

While both of these examples depict an outsourcing scenario, the same issues existed in moving processes to captive offshore operations.  Only mature/stable processes were candidates.

I must say that my thinking has evolved on this point.  I think that the abilities of the outsourcing service providers to tackle difficult transformation processes have matured incredibly.  In fact, most of the providers I speak with are not very excited about lift-and-shift opportunities.  Intuitively, they know that the expectations of their clients, over time, will be for process improvement.

Now, it’s dangerous to generalize and there are certainly cases where fix-and-ship should prevail, but I am guiding the executives I speak with to think seriously about their own abilities to do the fix work themselves.  Maybe their captive center has a better idea?  Maybe their outsourcing provider is making its own investments in new approaches.

One of the cornerstone questions on sourcing strategies is this one, and the answer is increasingly coming down on the side of ship-then-fix.

 

Sourcing Strategy Drivers: Three Big Questions

By Peter Allen, Partner & Managing Director, TPI

I tend to spend a good amount of my time helping organizations think through whether or not to offshore or outsource some of their business processes. It’s always an invigorating experience to help dig into the opportunities and risks associated with such significant changes to how business functions are organized and delivered. 
Some of the more common questions that arise with regard to sourcing strategy include:

• Should we fix and ship or ship and fix?  This question relates to the adequacy of a process’ operation and whether or not that process should be remediated prior to altering its delivery model.
• Is there significant value in IT-BPO synergy?  This topic is especially sensitive as companies look to gain benefits beyond wage arbitrage. The answer will steer the consideration of internal/external sourcing options and the candidacy of the providers. 
• What is the incentive for a service provider to automate/improve?  This is linked to the lingering issue of “innovation” (or lack thereof) in outsourcing.  It’s more acute for considering the outsourcing option, but I also hear it in the context of moving a process to a captive offshore location.

I’ll be sharing my views on these three strategy-driving questions in coming blog postings, but would welcome your thoughts.  Are there other drivers of strategy that you see of equal emphasis?  Let me know!

SIG Conference: Day 2 – eSourcing Insights and BPO Innovations

By Bill Huber, Director, CPO Services, TPI

eSourcing:

SAP and WE Energies provided some excellent, practical insights on how eSourcing auctions have been successfully conducted, and how they were able to diffuse the frequent arguments that reverse auctions destroy value.  As we have noted in the past, reverse auctions and other sourcing technologies are simply tools, and it is always the human element that determines whether tools will help to create or destroy value.  Gail DeVeau’s work at WE Energies is an example of how the tools can work in capable hands. 

The BPO Market:

Phil Fersht from AMR Research provided a broad overview of the direction of BPO. He shared many excellent nuggets with the group.  There were several highlights that stood out:

• There is a new breed of executive emerging that is looking at globalization and outsourcing.  In the 90’s the CIO had to move forward with enterprise resource planning (ERP) or be left behind.  Now, senior finance executives are feeling the need to move forward with globalization or be left behind.
• Healthcare analytics and sourcing from federal funding will be a growth area for sourcing professionals.  The stimulus plan confirms this.
• Many things that AMR Research has been telling clients not to do in outsourcing for years is now happening. Now companies are simply saying, “Take 30-40 % off bottom line. We are willing to take a leap of faith. We just want it done.”  The reality is that it takes 3-4 years to do effectively. 
• In outsourcing, client satisfaction trumps other service level agreements (SLAs).  If clients are satisfied and they feel that they are working with the provider, they will tend to be pleased even if there are problems in other SLAs.
• Procurement outsourcing will increase, partially because of the skill set issues facing procurement organizations, and knowledge process outsourcing (KPO) options available that are executable with relatively small headcounts. 
• Customers are asking procurement software vendors to provide more process support to      drive greater collaboration between procurement software providers and outsourcers.  Currently only about 15% of procurement BPO implementations involve technology transformation, far below other areas of BPO.
• KPO resources are often used to bring high value service to clients with the objective of ultimately growing the business into more scalable BPO. 

More insights from day 2 to follow…

 

The King is Back

Today's blog comes from Peter Allen, Partner and Managing Director, TPI.

“Forget about spending LESS, how do we avoid spending ANYTHING?”

There’s no question about it: cash is king today. The current global economic situation is motivating CFOs in companies across all industries to focus foremost on preservation of liquidity.  And that’ll drive more BPO.

My recent experience reinforces this truism.  Budgets for 2009 are being drawn down to levels that reflect a “no investment” mindset.  Cost avoidance is the phrase, and this tendency is self-evident for prospective buyers of outsourced services.

But it’s weighing on the service provider community. Outsourcing contracts are notoriously capital and cash flow intensive on service providers, especially in the earlier periods of a contract. Both capital and cash are put out early to acquire assets, establish the supporting infrastructure, transition the work processes, and develop business solutions.

So let’s not forget: service providers aren’t banks. They’re not a source of capital for core business operations. 

TCS-Citi Deal: Foreshadowing the 2009 Games

Today's blog comes from Peter Allen, Partner and Managing Director, TPI

The acquisition by TCS of Citigroup’s captive BPO operations feels to us like the latest in what’s becoming a series of industry restructurings.  It also sets the tone for what’s likely to become the agenda in 2009 for the financial services industry and certain outsourcing service providers.

Following on from the Aviva-WNS transaction, although that deal occurred moderately in advance of the current meltdown in the global financial services markets, the TCS-Citi transaction represents a strategy to fundamentally restructure and realign certain assets. These assets maintain essential operations for the likely survivors of the turmoil in today’s market. Their realignments will touch many balance sheets, especially in the case of Citi, as it reinvents itself through acquisitions and adjustments to its market offerings, and TCS which has a strong cash position and relatively little debt.

The service provider universe will certainly grow through creative combinations such as defined in this deal – an asset purchase with a companion, long-term, services agreement.  This transaction comprises a 9.5 year commitment by Citi to buy services from TCS, which represents a $2.5 billion “mega-deal.”  So, Citi is making a significant commitment to the ongoing viability of the offshore FSO market as well as a restructuring of its cost profile.  

Sharing the Pain

Today's blog comes from Peter Allen, Partner and Managing Director, TPI.

I spent last week in India, meeting with leaders of several prominent India-based IT/BPO services companies.  I also met with a few reporters.  You can only imagine the number of times the same question was asked:  What’s the likely impact of the U.S. financial services crisis on the IT/BPO ecosystem in India?

Financial services firms have been among the most prolific employers of the India technical populace.  While their loss to bankruptcies and acquisition over the recent weeks doesn’t directly translate into job impact in India, the fact of the matter is that pain will be shared across the globe.

Without any specific attribution, I will tell you that there is a decidedly alarmed tone among the corporate leadership in India.  Forget about particular client relationships, such as amounts owed by Lehman Brothers to its service providers.  Rather, the concern is as much social as it is corporate.

Waves of Change

Today's blog comes from Peter Allen, Partner and Managing Director, TPI. 

Keep an eye out for the ripples of activity in the insurance processing segment. There has been big movement by big players.

Last year, Prudential UK completed a large deal with Captiva, a real game-changer for managed service offerings for the insurance market.  Then, this year, along comes the Aviva-WNS deal - another big move foreshadowing some major market changes.

Large insurance organizations are looking to restructure their operations to improve their cost models, achieve more flexible capacity, and enhance their analytical capabilities. The insurance processing industry is saddled with a heavy legacy burden and the investments required to modernize and transform are daunting. 

Alas, that’s where the outsourcing industry comes into the picture, providing a leveraged investment approach for new capabilities and flexible capacity.

Over the past several years, insurance companies have increasingly leveraged offshore delivery, whether captive or outsourced, to reduce cost, increase efficiencies, and transform processes.  It’s the applications-support functions that are largely being supported offshore for both corporations and individuals. They include general insurance, healthcare, life and pensions, and property and casualty.

But very few insurance companies have aggressively moved key components of their operations offshore, and that gives rise to a rather attractive market opportunity. 

The Prudential UK and Aviva moves have paved the way for some increased market activity among the insurance segment. Question is: How long before the ripple effect turns into waves of change?

High Oil Prices, Rising Competitive Pressure and Increasing Globalisation Bring New Challenges to the Automotive Industry

Today’s guest commentary is by Klaus Felser, Senior Advisor TPI Germany.

The prospects for the automotive industry are many and varied – and in Germany, in particular, a vital economic factor. No other country has such a density of established automotive companies. Despite this, BMW, Volkswagen, Porsche, Audi and Daimler all have to hold their own on today’s world market. At stake is the development of markets with high growth potential, such as China (car production rose by 38% there in 2006 while the United States registered a decline of 6%) and India. At the same time, in more established markets it is necessary to contend with rising crude oil prices and deploy mitigating strategies to remain competitive.