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.

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.  

Checking Outsourcing

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

If you want to know what’s next in the outsourcing industry look at deviations away from historical norms, typically exhibited by change in market volumes.

To wit:  The popularity of credit card payments means that fewer and fewer American consumers write checks nowadays.  To the outsourcing industry, trends like these create opportunity for more leveraged service models.

Around 49.5 billion checks were paid in the U.S. during 1995, with that number slumping to 36.6 billion checks in 2003, according to data from the Federal Reserve. Meanwhile, credit card transactions leapt from 15.6 billion in 2000 to 19 billion in 2003, while debit card transactions surged from 8.3 billion to 15.6 billion over that time period.

Deadband Hiccups

James Effinger of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Deadbands are most often used to reduce administrative work.  Conceptually, it’s appealing. Practically, it doesn’t always work out to be easier.

Deadbands are generally defined as a small range around a contracted baseline volume against which no price adjustments (ARC/RRCs) are made.  For example, a given volume is 1,000 and the deadband is given as 5 percent.  Thus, for any volumes between 950 and 1,050, there are no price adjustments.

But chargeback can become problematic due to fluctuating unit prices around the upper and lower limits of the deadband.  Using the example above, assume the base charges for the contract volume of 1,000 is $1,000,000 (or $1,000 per unit). 

1. The effective unit rate at the upper limit (1,050 units) is $952. 
2. The effective unit rate at the lower limit (950 units) is $1,053.

This creates a difference in the effective unit rate between the upper and lower limit of approximately 10 percent. So when does it make sense to implement deadbands?

Owning Without Managing

Kevin Garten of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Does asset ownership dictate who performs asset management? Not anymore. In the days of yore, asset management in an outsourcing contract was made on the basis of ownership. Today, it’s based on configuration.

Originally, asset management was in reference to logging, tagging and tracking of the physical asset itself from cradle (purchase) to grave (disposal).  When it came to providing asset management in an outsourcing contract (be it an ITO or BPO sourcing arrangement) the decision was made on the basis of asset ownership.

Where Have All the Managers Gone? Check the Beach

Today's blog on F&A workforce trends comes from Peter Allen, Partner and Managing Director, TPI.

The talent gap may come in a rather sizable wave over the next few years, and the F&A outsourcing industry is coming of age at just the right time to bridge the gap.

I remember a conversation with the Corporate Controller of an F-100 company a few years back in which he asked, “If we outsource our finance functions, where will my replacement come from?”

It’s a very serious matter for companies and succession for key business support functions is a Board-level topic.

So, does outsourcing mitigate the risk of being caught without an acceptable successor to senior F&A leadership, or is it exacerbating the problem by moving the practical, hands-on work to external providers?

“Incent and Reward” versus “Lift and Drop”

Today’s guest blog on finance and accounting outsourcing (FAO) comes from Bill Frech, Partner & Managing Director, CFO Services North America, TPI.  

Standardization of processes and implementation of best practices requires a degree of maturity, but instead of explaining the nuances, some analysts have jumped on the bandwagon of blaming F&A outsourcing for missed expectations. Is their finger-pointing on target?

The waters are muddy, and we decided to clear up some common misconceptions by surveying a number of clients involved in TPI-advised deals that have been in place for over a year. Some were multifunctional, others were just finance and accounting deals, but they all have one thing in common: the deals are operating and proceeding well.