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.

 

IT Project Sins: Lessons from the British Computing Society Lovelace Lecture

By Daniel Jones, Partner and Director, Public Sector, TPI

I recently attended the annual British Computing Society Lovelace Lecture in London.  The lecturer, Maurice Perks, an IBM fellow, chose as his presentation title “The sins of IT projects and why they can fail”. He had boiled his experience down to 10 sins, having started originally with 7, deadly of course, and at one point having a list of 30.  No doubt most of us could easily add to his list of 10!

I started with low expectations, as the theme is one that is regularly reported on by government bodies in the UK, with a list of reasons that looks depressingly familiar.  The initial temptation was to wonder why we were not talking about how we get better by learning from past mistakes; which of course we did discuss as the evening progressed. In the event, Maurice delivered some very valuable insights across the whole spectrum of technical, operational, business and user perspectives.  Sourcing was mentioned, but more in passing than as a main theme.

So what did I take away from the evening?  Three things are very clear:

1. Select a supplier based on their ability to demonstrate use and adherence to robust methods that ensure that points of failure are avoided (e.g. interfaces that simply don’t join up or systems that don’t scale). 

   This, in turn, requires a good understanding of where the risks lie and of how best to mitigate them; just giving the end to end problem to one supplier may seem like a risk transfer, but it can go horribly wrong if the supplier lacks the engineering capabilities required.

2. Large-scale projects need to be planned and sourced with rigour; especially since they are unavoidable for many governments. They must also be flexible - due to the time it takes to deliver – with reasonable deadlines for completion. This requires honest and open dialogue in the sourcing process.
3. When running a sourcing process, it is vital to arrive at the contract award point with both the buying team and the supplier team ready and excited by the transition to delivery. Too often, at the end of major public sector procurement, both teams just want a holiday.

UK Public Sector Operational Efficiency Programme - An Opportunity or a Threat for Service Providers?

By: Daniel Jones, Partner, EMEA

After a year of investigation the Operational Efficiency Programme report appeared. The first paragraph states:

"In the current economic circumstances businesses are facing up to real challenges of cutting costs in order to stay in business and emerge stronger from the downturn. The public sector needs to do likewise, looking for savings in addition to the routine savings departments are expected to make each year, so that the Government can continue to invest in excellent public services while maintaining sustainable public finances." (Operational Efficiency Programme Final Report April 2009 - © Crown copyright 2009)

Those delivering public services, whether they are in-house operations or outsourcing suppliers, will no doubt be wondering if this is an opportunity or a threat.  In the areas of back office and information and communication technologies (ICT), the report points to an estimated annual savings of around £4bn and £3.2bn respectively.  It also recommends that these amounts be taken into account when determining future funding settlements.

External service suppliers can expect to come under pressure to reduce costs in some way.  This may not be a straightforward task for the customer to achieve, since the supply side is experiencing hard times. Suppliers, particularly those who might be struggling to deal with the downturn, are unlikely to accept lower revenues and margins without a compelling set of reasons.  Our experience shows that a robust approach is vital to ensure the right outcome is achieved.

For in-house operations, one possible future is to be merged into some form of shared service operation, either with other public sector bodies or with a commercial partner. If this is not the path chosen, then transformation will be the order of the day. Whatever the approach adopted, change needs to happen.

Will the programme drive new outsourcing contracts?  Interestingly, there is only passing mention of a potential increase in outsourcing as a means of achieving the estimated 20% savings. In the ICT area, the mechanisms for cost reduction, defined in the report, are to:

• Improve the collection, reporting, benchmarking and review of data on IT spend across the public sector;
• Strengthen the governance of IT- enabled change projects;
• Strengthen Gateway assurance processes for all IT- enabled change projects;
• Implement portfolio management processes to prioritise projects and resources and to reduce overlap and duplication in IT- enabled change projects;
• Promote greater standardisation and simplification of IT systems, desktops, infrastructure and applications across the public sector; and
• Develop the internal IT capability within the public sector and continue to professionalise the IT function.

The key to success is to remember that the end goal is to achieve the savings.  The best public sector organisations will find ways to minimise the pain by engaging with their staff and with suppliers to find innovative solutions. Shared services, outsourcing and standardisation are all possible routes to the end result; they aren’t mutually exclusive and should be evaluated as part of a smart sourcing strategy that delivers improved front line services and lower costs at the earliest possible date.

So are the conclusions from the report an opportunity or a threat? Well, change has to happen, and for those who see change as opportunity, it is now knocking loudly.

The full report is available at: www.hm-treasury.gov.uk/vfm_operational_efficiency.htm

IT Trends Impacting Outsourcing Agreements

Today's blog on IT trends comes from Mike Slavin, Partner & Managing Director, CIO Services North America, TPI

It has become commonplace for CIOs to ask about current or upcoming IT trends that may impact outsourcing agreements.  I tend to answer such questions based on two factors relevant to companies active in outsourcing – the types of IT services used and the IT outsourcing strategies deployed for enterprise.

First, one must consider the types of IT services available for enterprises.  The emergence of ‘cloud computing’ as the IT industry’s consumption-based, utility-oriented service solution cannot be ignored (10 Cloud Computing Predictions For 2009, InformationWeek). Recent initiatives of a similar nature have not delivered on the promise of a truly variable cost for infrastructure services, but the under-achievements of the past should not encourage complacency among organizations.  There are several endeavors underway to bring to market ubiquitous classes of IT services meant to offer favorable pricing in return for adoption of standard utilities.

Beyond infrastructure services, trends are developing around platform-based services that allow for greater consideration of ‘managed services’ operations as a silo-breaking alternative to proprietary applications development.  Most industries, including the healthcare Payer community, have for many years used a model through which investments are made in custom/unique business applications. As a result, it is not uncommon for a Payer organization to use hundreds or thousands of business applications throughout the enterprise and not know how many software assets exist throughout a company network.  Such is the complex nature of most legacy environments.

In both scenarios – infrastructure services and applications development – fundamental questions are being asked about the merits of building versus buying the functionality required.  Changes to operating requirements are forcing organizations to rethink the merits of current investments. These changes are precipitated by regulatory activity and economic motives to simplify and standardize business processes.

One trend that has the potential to materially influence an IT outsourcing strategy involves taking a holistic approach to considering whether to buy a service or continue to invest in building ones own.  The criteria for such decisions vary, but TPI has put forth a framework for evaluating these alternatives called the 3C Framework for Successful Sourcing Strategies. 

Another trend influencing IT outsourcing strategy relates to contracting form.  This dimension is driven to a great degree by the previously mentioned build-vs.-buy strategy, but also considers the degree of transformation implied by the sourcing initiative.  We see contracting terms for IT services settling in the range of 5 years, and a continued emphasis on best-of-breed providers. 

Both factors demand that clients adopt a highly capable sourcing management competency as a core for their organizations.

Today’s market economics are expected to yield even more changes in the service provider community, with consolidation likely among certain provider classes.  Further, we envision other market endeavors, such as joint ventures and divestiture of captive operations to create greater options for clients.  It is important that the form of today’s contracts allow for taking advantage of future opportunities if/when they arise.

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.

Peeling the IT Layers

Today’s guest blog on what a recession could mean for the IT sector comes from Dinesh Goel, Project Director, TPI.

The era of abnormal growth for India-based IT service providers is nearly over. They’ve reported lower growth rates on both top-line and bottom-line performance in their latest quarterly results.

So what does this mean? Is the IT sector heading for a downturn in the wake of a tough U.S. and global economic environment?

Most equity analysts are already moving India-based providers down to “underperform” or “sell” ratings. Newsprint is consumed with stories and interviews on how the tough business conditions will promote cost-cutting outsourcing and off-shoring. Bottom line is: there’s too much confusion in the marketplace regarding the performance of IT sector.

Paradoxical Market Metrics

Today's blog on TPI's 2008 second quarter Index comes from Peter Allen, Partner and Managing Director, TPI.

Having just posted the scorecard for the global outsourcing industry’s contract awards for the first half of 2008, I must say that there are more than a few conflicting messages being bantered about.

We’ve been producing the TPI Index for almost six years now, and our track record of reporting on the market size and trajectory has a consistently small margin of error. No one is perfect in this art, but our business intelligence analysts are usually right on target. We invest considerably in tracking the market to help guide our clients with facts about peers and providers in particular domains.

The report for the first half of 2008 was striking.

Listening to the Buy-Side

Today's blog on TPI's Americas Sourcing Leadership Exchange (SLE) comes from Peter Allen, Partner and Managing Director, TPI.

Falling quickly on the heels of our Americas Sourcing Industry Conference (SIC) held for service providers, we conducted our latest Americas Sourcing Leadership Exchange (SLE) for buy-side participants last week in Chicago.

What can one learn from spending a couple of days with almost 200 executives who are actively involved in the outsourcing business proposition and battling the recessionary markets of 2008?  Plenty.

Despite some of the popular conjecture about a slowdown in the adoption of outsourcing, this was our largest SLE ever, and the attendees generally expressed a desire to become ever MORE active in using outsourcing to achieve greater variability in their corporate cost profiles.

Many of the attendees, whether in the planning stages or actively managing existing arrangements, were keen on achieving even greater flexibility in their costs.  The discussions around captive operations, shared services and internal optimization received considerable air time when considered in contrast to outsourcing.