Procurement Outsourcing IV: Is It Right For You?

This summer, one of my weekend series over on eSourcing Forum focused on Procurement Outsourcing. This series discussed some basic reasons for outsourcing, discussed the different levels, gave you some high level direction into what you should outsource, some tips for identifying a good Procurement Services Provider (PSP), some suggestions for tackling the SLA (Service Level Agreement), and some best practices to follow in preparing for the transition.

In order to entice you to keep reading, I’d like to point out the benefits that can be gained from successful outsourcing initiatives, as per Aberdeen’s May 2006 Procurement Outsourcing Benchmark Report. The study found that best-in-class companies achieved improvements that were almost 2.2 times, on average, better than all respondents on seven key metrics. These results, summarized in Aberdeen’s August 2006 Procurement: Are You Ready to Outsource? Enterprise Strategies, were as follows:

Benefit Achieved Best-in-class All respondents Ratio
Access to Supplier Intelligence 86% 33% 2.6
Fewer FTEs 71% 32% 2.2
Access to Category Expertise 71% 38% 1.9
Enhanced Ability to Track and Report Savings to the Company’s Bottom Line 43% 15% 2.9
Access to Improved Pricing 71% 48% 1.5
Improved Visibility into Spending 43% 21% 2.0
Refocus Procurement Team on More Strategic Activities 43% 23% 1.9

In other words, if you outsource, and outsource well, you can achieve substantial benefits. However, these results, and the insight piece, overlook one fundamental question – Is it right for you? Unless you’re a perfect organization who does everything perfect, then you should definitely outsource. Since there is no such thing as a perfect organization, as all organization’s have their strengths and weaknesses, outsourcing is definitely something that should be considered. In the procurement organization, the same argument applies. It’s something you should consider, but you should only do it if it makes sense to do so and the benefits – operating cost reduction, capital investment reduction, access to new technology and processes, or an increase in flexibility, for example – are there.

As with the Aberdeen Insight piece, my previous posts also did not tackle the question “Is it right for you?” directly, mainly because this is a very tough question to answer, and the best way I can find to approach it is to describe what kind of organization it is right for, but a Critical Issues Report by CAPS last year, entitled Outsourcing Strategies and Implications, is very insightful.

The benefits will only be there if the business functions you intend to outsource can be done better by the PSP you have selected AND outsourcing fits your organizational culture. This second requirement is often overlooked. If you’re not set up for outsourcing, if many individuals or departments fight any initiative you’re going to undertake, or if the PSP’s technology and processes are incompatible with yours, you are not going to see the benefit. Therefore, before you outsource, you need to make sure outsourcing is right for you. If it’s not, you either have to find internal alternatives, or, better yet, change your organizational culture so that outsourcing of functions and categories that can be done better by a PSP fits into your culture.

One of the key points made by the CAPS Critical Issue Report is that outsourcing is a strategy that complements a larger business model. Your larger business model needs to be conducive to outsourcing. It needs to be based on a culture of continual process improvement, regardless of whether or not it is internal or external, and, most importantly, and this is also overlooked by many articles, your business model needs to be focused on your core assets – your people. Outsourcing should displace resources within your oganization, it should not remove those resources from your organization. You outsource to a PSP to reduce the tactical burden on your procurement professionals, freeing them up to spend more time on the strategic planning and secondary spend categories they would otherwise not have time to address. The Hallmark example in the CAPS report provides a brilliant example of the success can be achieved when you focus on improvement and not simply headcount reduction. The following paragraph in particular makes my point:

In order to make the transition, Hallmark kept its corporate beliefs and values foremost as a guide. This meant open communication with employees and a very gradual transition. Domestic workers who previously worked on handwork were either retrained, placed in other positions, or opted for early retirement, thus avoiding layoffs. Remember that at all times you need to maintain an innovative culture, and this is hard to foster in an organization who places its emphasis on the bottom-line and not the employees who create the bottom line.