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.

Financial Data Perfection vs. Pragmatism

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

Striking the balance between data accuracy and time spent data collecting, prior to entering into a sourcing contract, helps determine risk down the road.

When assessing a potential sourcing opportunity, a significant amount of effort is involved in assembling the required financial data to support RFP development and the evaluation process.  Much of this effort involves building a financial base case that represents the current spend for the in-scope services, along with the underlying “units of consumption,” or resource volumes that the base case spend accommodates.

Clients often weigh the trade-off between time spent collecting, organizing, and validating data versus its accuracy.  Relevant data is often not as readily available as clients may hope, which may be due to a variety of factors:

It’s a Government Thing

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

Every business has industry-unique requirements that must be attended to when contemplating a business process change as significant as outsourcing.  State government is no different. 

If you haven’t noticed, the state government community is showing an increased level of interest in IT outsourcing and is focused on exploring the leverage potential in data center consolidations.  Several states have already contracted with service providers and several more are currently exploring their options.

From a financial perspective, it is imperative the outsourcing project team address the current and future budget process and ensure continued participation from all agency funding sources. With increasingly tighter budgets, grave security threats, inadequate disaster recovery capabilities, and an aging workforce, state agencies are turning to the market place for help as many currently manage and maintain independent IT shops without taking full advantage of the enterprise opportunities of the entire state. 

Pulling the Renegotiation Levers

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

Of the many factors that come into play during sourcing decision-making, financial drivers within the existing contract are critical.

Companies must decide whether to renegotiate their contract with their current provider (re-source), choose a new service provider, or bring the services back in house (in-source). Several clients that I worked with over the past couple of years made a conscience decision to renegotiate with their current service provider based solely on the overall financial implications of the deal.  For more information, check out my colleague's whitepaper.

Service levels, client satisfaction surveys, balance of trade issues, and executive relationships all had an impact in renegotiations, but the most important factors for these clients were based on the NPV (net present value) and profit margins over the term of the deal.

Mapping Personnel by Service Tower

Today's guest blog on personnel considerations in IT outsourcing comes from Ray Bender, Senior Advisor, TPI.

How critical is quantifying the number of personnel who support the services you are evaluating for a potential IT outsourcing engagement?

Staffing and personnel costs generally form a significant portion of every IT budget. The percentages vary depending on the type of services being considered for outsourcing. Application development, maintenance and help desk services are on one end of the spectrum with a high percentage of labor costs, while mainframe and server support services are at the other. The percentage of staffing costs for network services depend on whether telecommunication carrier expenditures are part of the budget or a separate expense category.

The better you know the staff supporting the function and their corresponding expense structure, the better you will be able to develop a sound business case on which to base your financial evaluation.

Deal Financial Management 101

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

The only thing that doesn’t change is change. Even before you go live, you can rest assured the environment is different from when the contract was signed. Heck, you know it was outdated when you signed it!

As we all know, a lot of time and effort is spent on understanding the financial value of sourcing contracts (aka “business case”) during the bidding and negotiations process. While this is absolutely required, much of it will be for naught if focus in this area is reduced or removed once the agreement gets inked.

Server Consolidation within Outsourcing Contracts

Guest blogger Carol Wright of TPI’s Financial Analysis Services Group “blogging about the bottom line”

Service providers are increasingly touting “server consolidation” as a sure way to cut costs in IT sourcing contracts. Providers typically offer guaranteed price decreases based on a commitment to reduce the total number of client servers. However, guaranteed decrease in price shouldn’t drive hasty contract signing.

The two primary alternatives include: consolidation guarantees within a sourcing contract via contractual price reductions, and project by project consolidation efforts.

Should your Service Provider also be your Bank?

Each week TPI’s Financial Analysis Services Group will be “blogging about the bottom line.”  The group’s first guest blog comes from Tim Langley-Hawthorne, Director at TPI.

IT asset management is generally a pain. Most clients I’ve worked with struggle to do a good job at this basic task.  When considering IT outsourcing, the natural temptation for clients is to get out of the IT asset business, and have the service provider take over asset management and ownership responsibilities.

But the objective to clean house and transfer IT asset ownership to the service provider may be in conflict with the company desire to achieve ongoing financial savings from outsourcing.