P@33 – Why externalization of Procurement resources has just become the norm

Procurement function is going through a necessary and intense process of transformation meaning that we should move towards a more Scientific Procurement function. In previous posts and in order to realize such upgrade, we defined several steps: analyzing the macro photo, defining the right Procurement outputs and improving ourProcurement Processes, Systems and tools. Even with these strong foundations, materialization and success will come thanks to great Procurement people and a good use of often too limited resources.

Procurement teams have a lot of tactical work to perform, many daily issues to solve, and several key risks to mitigate in order to ensure that business runs smoothly. It is not an easy task. In addition, they manage more and more strategic initiatives and vendor relationships to increase value delivery to the business beyond pure Quality/Costs/Delivery results.

At the same time, all studies show that there is a limited increase (when not a reduction) of Procurement budgets and resources. In many cases, we will have less internal resources, knowing that a talent war is coming out. This is a tough challenge for many Procurement leaders.

We previously saw that optimizing processes and systems is part of the solution. Outsourcing is another good option. Externalization of our operations is just becoming the norm.

We can benefit from 4 types of outsourced activities:

• Consulting: we contract highly prepared consultants for any diagnostic activities, any transformation initiatives, for complex and/or strategic Procurement co-leaded projects.
• Staffing: is a good solution to quickly get skilled buyers who will generally work according to our own processes and systems. In this service, you can find both modalities: implant or outplant. This is useful:
• for tactical and daily procurement activities, or
• when the procurement teams are punctually overloaded, or
• when we start to operate in a new country and have to go fast, or
• when we have no specific knowledge on a category and we need to optimize the buying process. 
• BPO: is highly recommended for recurrent, back office, administrative, compliance, reporting tasks as well as for any other transactional activities. It is also an effective approach to deliver Procurement ‘help-desk’ services in the case of big multinational organizations.
• Specific Services: cover different service provisions in the field of analytics and market research, supplier audits, pricing & contract compliance, e-auction support, etc…

Advantages of Procurement Outsourcing are quite clear on the Power Point:

• Higher flexibility vs workload
• Immediate access to expertise, best practices and benchmarks
• Variable costs for our procurement operations and own functional budget

In real life, contract setting, implementation phase, supplier mgmt., daily performance mgmt. are not easy. There is much to learn for us, the buyers, as vendors are much more experienced than we are.

Based on my own experience, here are some recommendations:

• Service specifications and IT needs: an outsourcing project won’t be able to solve existing specification problems or non-optimal internal processes. The best path is first to try to internally fix the key problems before moving to an outsourcing solution. Another key point is to clarify the IT needs. How will external staff connect to our own systems? How will we integrate supplier systems into our IT environment? Vendors who already know those potential difficulties often choose not to mention them upfront; they rather prefer to solve those issues once they occur during the implementation phase (by asking for more time / resources / money).
• Big benefits on the Power Point but not so many in real life: during selling process, vendors always refer to a long list of great advantages; service provision is often quite different. Outsourcing vendors could do a better job at being more realistic on the real performance and claim for long term constructive and collaborative relationships that will allow continuous improvement. Customers should be much more cautious when listening to the vendors.  It is key to align on expectations from both sides. After a few months of implementation, it is not uncommon to see discrepancies and discussions between the client and the supplier due to a lack of alignment on expected vs achieved results. Once again, vendors are aware of it well before.
• Collaborative mindset: Outsourcing requires the entire buyer’s organization to consider the vendor as a real partner, an extension of the company. It means developing strong SRM or any other improved collaborative approach.
• Examples of contracts, reporting, KPIs: during tendering process, buyers should ask the vendors for real examples of contracts, reporting and KPIs. Without this pro-active step, contractual negotiations can become much more complex. Checking in advance the reporting capabilities of the vendor and thinking about meaningful KPIs will surely avoid us long and painful discussions. Once awarded, experienced suppliers have no problem to fight for any contractual clause; they are trained to explain why the reporting mechanisms are not yet in place after 6 months; they are brilliant at suggesting KPIs that are more favorable to them, or even worse, proposing KPIs that do not reflect the reality of the provided services (in such case, the vendor can report all agreed KPIs as being fully achieved, meanwhile, on site, there are permanent and significant quality issues).
• Define minimum profile/experience of the employees and staff rotation. This is self-explanatory.
• It is also fundamental to clarify upfront the integration and communication mechanisms between external staff and company employees. In many firms, internal rules regarding external staff mgmt. have become stricter due to legal and social risks.
• Fix with the vendors how they will formalize and update the SOPs (Standard Operating Procedures) and how they will ensure proper knowledge mgmt. and transfer from one exiting employee to a new employee.
• Finally, think in detail about reversibility criteria and action plan in order to put all that in a contractual clause.

In a company, I progressively ramped up the 4 types of services. Implementation phase and daily mgmt. were not always easy; we even had to change one supplier for not being able to get the right relationship and the right performance measurement / achievement. In several occasions we hired consultants and specific services to go faster: we had mixed results.

The biggest benefit was the split of tasks and roles.  With transactional resources based in Eastern Europe, tactical buyers located in an implant in our offices, my team of buyers became mostly dedicated to strategic Procurement activities. This split became also quickly clear for our internal customers.

Externalization of part of our Procurement operations is a clear direction if we want our teams to focus on the strategic activities and value creation. So are we aware about the local supplier market and the different options? Which option would be more meaningful for our function and company? Are we ready to present a strong business case for approval to CFO and CEO?