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: 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 – Examining Offshore Measures & Encouraging Tech Advancement

By Bill Huber, Director, CPO Services, TPI 

Captive vs. Outsource:

DuPont’s Frank Conway co-presented with our own Brian Smith  on the considerations between captive and outsourced solutions, which they compared to “seeing in a sandstorm.”  

As Frank pointed out, the decision is often a journey that reflects executives’ mindsets.  Having a captive can have a strong psychological benefit, but when times get tough, executives can often swing from not wanting to outsource to trying to outsource too much.   

• Frank also pointed out that whether outsourcing or managing a captive, you never give up your ultimate accountability.  The buck stops with you.  Whether it is outsourced, internal, onshore or offshore, the CEO expects it to work.
• Brian Smith noted that the most efficient captives and service providers achieve a fairly similar cost level, with the best captives operating at a 2%-4% lower cost than the best service providers.  However, median service provider costs amount to 79% of median captive costs.  Two reasons for this are that captives tend to have a significantly higher percentage of support staff, and a lower span of control (Apparently there are a number of captives that are currently “for sale”).

 

Newt Gingrich:

Former Speaker of the House Newt Gingrich provided the keynote at today’s lunch, covering an encyclopedic range of issues.  Equally critical of both U.S. political parties, he emphasized more changes in technology in the next 25 years than in the previous 125. He pointed out that no bureaucracy could possibly grasp, plan for, or react to this level of change and that only the private sector, reacting to the market, often through trial and error will be able to take our economy through this change. 

His key challenge to the sourcing audiences: 

Define what conditions would be required for the U.S. to be the preferred sourcing destination for more business activities, and become a force to advocate for those changes.  He mentioned taxes, regulation, education, and energy among those key issues.

Newt also pointed out that those countries that become protectionist, ultimately lag in technology, become more expensive and ultimately become backwaters on the global stage.  

The audience appeared to like Gingrich’s messages. Stay tuned for some more from day 2…

  

SIG Conference: Day 1 Review – First Impressions

By Bill Huber, Director, CPO Services, TPI

The 35th Sourcing Interests Group kicked off its summit yesterday in Baltimore, MD.  There are over 325 attendees this year, up slightly from last fall.  The healthy attendance at a time when discretionary travel has been restricted across the board underscores the critical importance of current sourcing issues. 

I had the opportunity to speak with a number of the delegates during the opening reception and breaks.  Several themes are emerging:

Increased focus on domestic outsourcing:

• A document management outsourcer discussed how the past year has been net neutral in terms of full time employees (FTEs), despite the declining economy and the loss of some customers from industry consolidation.  Most of the work performed is domestic and on site at client locations. 
• A financial services executive was looking for domestic outsourcing providers.  Looking for opportunities to save money that would not get them into political trouble since the strings attached with TARP funding are onerous.
• An Indian based provider outlined recruiting activities around certain U.S. hub cities.

Increased focus on procurement outsourcing:

• One company case example discussed indirect procurement as one of three “towers” outsourced along with IT applications and Finance and Administration.  Of these three towers, procurement has the smallest impact on headcount and the largest business case impact and overall cost savings.

Shortening of outsourcing cycle times:

• Unisys CEO Ed Coleman used the term “sourcing speed dating”  in reference to what he described as a “12 month cycle to make an outsourcing decision.”  Coleman pointed out that many companies simply don’t have time for that when  thriftiness and simplicity are prevailing themes.    If outsourcing can save money, how can companies afford to take 12 months to implement it?  Every month that goes by means savings dollars out the door. Coleman also predicted increased movement to “platform as a service” delivery models where customers can “buy by the drink.”

Innovation:

• During the “Less is More” period, companies must wring additional value from existing capital investments, including outsourcing relationships.  Several providers indicated that their customers are constantly looking for price concessions, but only now are they beginning to act on cost savings opportunities through innovation that were previously ignored.  While customers still expect to see some movement on price, they are appreciative of those providers who can bring meaningful suggestions for improving operations and reducing overall costs. 
• In his keynote presentation, TCS America President Surya Kant identified three techniques to improve innovation in outsourcing:
  1. Contracts with funding budgets specifically set aside for innovation initiatives
  2. Contracts with cost savings guaranteed through innovation provisions
  3. Joint governance metrics on the number of proactive innovation proposals submitted by the service provider, the percentage accepted by the customer, and the benefits realized from implemented innovations

Where will this lead?  Here are my initial predictions:

• Indian and multi-national service providers will increasingly develop approaches to export some of their operational capabilities in employee on-boarding, training, process mapping, technology, and performance measurement to North America to increase delivery of outsourcing within the U.S. to complement their offshore capabilities.  Reduced labor arbitrage benefits will be partially offset by a more favorable political/regulatory climate for domestic approaches, especially within certain industries such as financial services and automotive. 
• Similarly, providers will continue to increase their philanthropic participation in their customers’ communities.   
• Sourcing will increasingly include elements of provider/customer collaboration during the selection process, focusing on innovation and flexible relationships that can mature over time. 
• Companies will shift more of their sourcing energies from the transaction to the governance process to optimize their strategic relationships. Governance will be accomplished at a more strategic level, focusing on capability alignment and innovation as equally important to operational and financial metrics.

More to follow!  Stay tuned…

Captives May Not Always Be What They Seem

By Brian Smith, Partner & Managing Director, FSO Services North America, TPI

Global organizations typically offshore a broad range of business processes. To optimize their resources, early adopters, particularly those in the financial services industry (Citibank and Standard Chartered Bank, as examples), established their own wholly owned and operated offshore business units, called “captive centers.” In light of recent events in India (Satyam, Mumbai attacks) and the changes in economic priorities in their home markets, global companies have begun to rethink their sourcing strategy and review the mix of outsourced and captive solutions, and the onshore/offshore mix. Like Nick Heath’s article, Banks: Offshoring, Not Outsourcing (BusinessWeek Online) explains, Satyam and regulatory scrutiny has made many institutions wary of the risks associated with trusting third parties with information.

While it may seem like a good idea to revert to relying on captives, there are various other structures that can mitigate risk without the capital expense. Since many captives often do not attain critical mass, they eventually lack the efficiency that parent entities want and become a liability instead of an asset. Captive units that do not reach critical scale are often 30 to 50 percent more expensive than the median third parties after a company either invests in revitalizing the captive and later sells the business to a third party after the captive atrophies beyond repair. A minority of captives or “best-in-class” captives, however, can attain cost performance gains better than those of the third-party service providers.

Alternatively, parent companies are increasingly evolving toward a balanced hybrid captive model, retaining strategic core employees while the commodity work is spun off to third parties. A hybrid captive model offers the following benefits:

• Leverages the captive’s premises improving its efficiency ratio
• Makes better use of fixed overhead
• Can be perceived as reducing risk
• Lowers the cost of third-party resources, since the service provider does not need to provide infrastructure, secured space, and other resources that the captive possesses.

The hybrid captive concept has emerged as a means of structuring a relationship that gives the buyer of services a significant degree of transparency and management oversight over operations carried out offshore by a service provider.

Increasingly, as firms move to second-generation offshoring, it is necessary to look beyond labor arbitrage as a means to increase capability and variable capacity that helps achieve previously unattainable value. Evaluating your organization’s strengths and analyzing which approaches can help optimize your offshoring strategy can unlock value not previously seen in previous or current labor arbitrage experiences.

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?

Picking the Sourcing Flavors

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

Across professions and industries, those of us who provide services to paying customers strive to obtain a position of recognition best evidenced by the difference made to those who hire us for our expertise.  It’s human nature. 

Unless we’re truly in the business of providing non-differentiated (aka commodity) services to our customers, we want to be recognized and compensated for being better at what we do than others in our field of work.  We also want to recover our investments and the risks we take in building an offering to serve a market need.

In the field of outsourced services, many outsourcing buyers and their service providers are asking whether there’s an opportunity to achieve partnership-oriented relationships.  Conversely, has the industry moved to a position analogous to that of gasoline stations where providers on virtually every corner compete on the basis of unit prices?

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.

Questioning India’s Dominance

Today’s guest blog on India's domination of the offshoring market comes from Dinesh Goel, Project Director, TPI.

In the wake of exogenous and endogenous developments, is India challenged as a dominant offshore destination? Probably not. It is arguable if India’s dominance is a foregone conclusion. Almost certainly, India is likely to lose some market share though.

Endogenous factors that raise a question mark on the dominance of India include talent shortage, creaking infrastructure, unyielding bureaucracy, and rising cost structure on the back of rupee appreciation (though recently rupee has succumbed to dollar by circa 5%). Exogenous factors, on the other hand, encompass diversity and resilience requirements of the buyer community beyond India, incentives offered by various governments to offer competition to India, and the frantic pace at which English is being taught in China et al.

Despite the constraints and inhibiting factors, India is, likely to remain the most attractive destination for delivery of offshore services in the medium to long term. Here’s the rationale: