Monthly Archives: October 2006

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.

Do you need a Chief Strategy Management Officer?

Perusing the CFO Research Services site, I came across the Corporate Performance Management: How Committed Leaders Drive Results Report, consisting of conclusions papers from the CFO executive conference held earlier this year in New York, New York.

The second mini-paper in the report was Aligning the finance function to strategy execution based on a presentation by Robert Kaplan, co-developer of the balanced scorecard and a Professor at Harvard Business School. In this presentation, Robert Kaplan discussed various approaches for aligning the finance function more strategically with the goals of business units and corporate leaders, including:

  • the use of balanced scorecards as a shared framework to run the business, guide the operating agenda, and evaluate progress against strategy;
  • the use of activity-based budgeting to link the strategic planning capability of Balanced Scorecards with the operational budgeting mechanism of a time-driven ABC (activity-based costing) model; and
  • Establishing a new Office of Strategy Management to help execute strategy more effectively.

These are all fantastic recommendations, after all, scorecarding is something I recommend you use in your sourcing organization as it is one of the few mechanisms for addressing operations as a whole, activity-based budgeting makes more sense to me than silo-based budgeting since most activities today cut across traditional organizational boundaries, and the key to the development of a first-class supply chain is a good strategy.

My question is whether or not you really need an Office of Strategy Management and a Chief Strategy Management Officer. I whole-heartedly agree on the paramount importance of good business strategy and the need to elevate strategy at the senior executive level, definately agree that you should have a strategy team, and see the importance of good execution and communication of strategy throughout the organization, but am curious as to why this function cannot be appropriately handled by the CEO, CFO, COO, CPO, and CCO. (Chief Executive Officer, Chief Finance Officer, Chief Operations Officer, Chief Procurement Officer, and Chief Communications Officer.)

According to the mini-paper, Kaplan advocates the adoption of a new two-to-six person Office of Strategy Management to be led by a Chief Strategy Management Officer (CSMO). This CSMO would ideally report to the CEO or COO but could also report to the CFO, especially at companies where the planning chief already reports to the CFO. The CSMO’s job would be to formulate and communicate strategy and to oversee its execution. He would help breach silos by coordinating strategy across functions. He would make sure that all business and support groups were aligned with the enterprise strategy and that strategy remained a high management and board priority.

I don’t know about you, but this sounds like a CPO role description to me. After all, with procurement about to become the center of tomorrow’s organization (as per my eSourcingForum Purchasing Innovation series, including my post on Sourcing the New Organization), it is going to be the CPO’s job to breach silos, align business groups, and lead strategic initiatives on a daily basis. Thus, I believe that strategy should be led by the CPO, with appropriate input and support from the rest of the CXO team, especially the CCO who will need to help communicate the corporate strategies to the rest of the organization.

But the role of executive leadership is critical to sustain the focus in people’s busy lives, Robert Kaplan is not just any bloke, I was not fortunate enought to attend the talk and had to settle for the summary, and this topic certainly deserves some very deep thought. Strategy is critical. Maybe you need a separate unit and a new CXO, maybe the CPO can handle it appropriately backed by the rest of the executive team, and maybe you need a strategy coordinator that reports to the COO or CPO. It’s a tough question. Anyone have any additional thoughts or comments on the matter? Any fellow bloggers want to chime in?

The E-Procurement Benchmark Report

This summer Aberdeen released its fourth E-Procurement Benchmark Report, E-Procurement 2.0, where Aberdeen found that like your local mail service, e-procurement steadily delivers.

According to the report, enterprises participating in the 2006 benchmark report that they:

  • increased their spend under management by 36%
  • reduced their requisition-to-order cycles by 75%
  • reduced their requisition-to-order costs by 48%
  • reduced their maverick spend by 36%

However, the report also found that there is tremendous opportunity for many procurement organizations to improve their performance as a significant gap exists between the Best-in-Class companies and the rest of the field. Specifically, best-in-class companies have the following significant advantages over all others:

  • 28.6% improvement in spend compliance
  • 90.9% improvement in spend under management
  • 41.6% impact on requisition-to-order cycle-time
  • 23.3% impact on requisition-to-order costs

There’s a lot of good information in this report, and I’d suggest you download a copy and read it if you haven’t already while it’s still sponsored. More over, the “Steps to Success” are dead-on.

Moreover, if you’re not employing e-procurement solutions, given the expected improvements outlined above, there is no absolutely no reason you shouldn’t be, especially since a funny thing happened since Aberdeen Group delivered its initial E-Procurement Benchmark Report in 1998: solution providers developed functionality effective, cost-efficient, and rapidly deployable e-procurement solutions and large, mid-size, and small enterprises utilized them to place more spend under management and ignite the transformation of their procurement organizations.

Managing Global Trade Data

In our last post on Global Trade Data Management we indicated that not a lot of focus has been traditionally placed on the management of Global Trade Data because, if it’s done right, there are no significant savings opportunities and most companies still are not really aware that they should be focused on it. The reason they should be focused on it is that error rates in global trade processes approach 10% to 20% and this is costing many companies millions of dollars, especially when affordable technology solutions to tackle these problems now exist.

Why is managing global trade data so important? In addition to the fact that the Customs Modernization Act of 1993 shifted the responsibility of documentation accuracy from the government to the importer and that errors can result in long delays, huge fines or overpayments (that the government will not identify for you), this years budget for US Customers and Border Protection (CBP) increased 4.8%. As part of this increase, CBP plans to spend $305M in the implementation of the Automated Commercial Environment (ACE) and another $16M on the International Trade Data System (ITDS) program in conjunction with the Customs Trade Partnership Against Terrorism (C-TPAT). When you combine these initiatives with the compliance legislation of the recent Sarbanes-Oxley act, the level of visibility and control you really need with respect to your trade data is probably well beyond what you have. And since you never know when you could be audited, which is probably more likely than you think when you consider that statistics indicate that the goverment collects $7 in fines and interest on underpayments for every $1 it spends on a trade-compliance audit, you should be getting your data into shape now. (Furthermore, in addition to the Securities and Exchange Commission, depending on what you are importing or exporting, you may also be subject to oversight from the Department of Transportation, Department of Defense, Federal Communications Commission, Federal Aviation Commission, and the Food and Drug Administration, for example.)

You start with an audit of your current processes, systems, and, most importantly data, to determine where the issues are and what you have to address. A company like Global Data Mining can help you do this using a 3-R process that recreates years of historical import transactions to identify and quantify errors and non-compliance activities, produces executive-level reports to provide decision makers the information they need to determine priorities and define go-forward plans, and reparis existing data and current control processes to prevent the same mistakes from happening again.

Manual processes, which are still standard for the majority of importers, and which typically rely on a person to make a decision with only shorthand invoice descriptions available, are subject to errors and generally produce the following common inaccuracies:

  • inaccurate notation of merchandise value
  • improper classification of merchandise
  • incorrect payment and documentation of duties

Generally speaking, your reporting process will highlight these issues and your repair process will focus on implementing new, preferably technology driven, processes that will prevent these errors from happening again.

The reality is that despite the fact there are tens of thousands of rulings by US Customs that need to be referred to in product classification, and that this shear number is beyond the grasp of even the best of human experts, this is a very small number from a systems perspective and a good technology solution can locate and apply the right ruling, classification, and rate in a fraction of a second with the right description and HTS codes.

For more information, I encourage you to check out Global Data Mining’s white papers and their white paper on Import Compliance in particular. I think it will be worth your time.

Global Trade Data Management

We’ve discussed Global Supplier Visibility and Performance, Supply Chain Finance, and even Supply Chain Audits, but we have not yet delved into Global Trade Data Management, an area that, if mismanaged, can cost you millions of dollars.

Why? Maybe it’s because if it’s done properly, there are no considerable savings opportunities when compared with other areas of the supply chain. With visibility, there are always new ways to manage risk that can be significantly more cost competitive. With finance, new payment methods or arrangements always present noticably increased potential. With sourcing, we know where the enormous opportunities are. With global trade, governments fix tariffs and duties and that’s that.

But only if your items are property classified and validated and only if you pay the right amount. The reality is that, in many corporations, error rates in global trade processes approach 10% to 20%. The effective control of global trade processes is often 100 to 200 times worse compared to accounts payable processes in the same company.

Why? A combination of reasons. Up until 1993, the government was responsible for reviewing the accuracy of documentation and markings and assessing appropriate duties. Then the Customs Modernization Act shifted responsibility for import compliance to the importer. Businesses were not ready, so they deferred to third-party providers (customhouse brokerage services). But as they expanded, so did the broad range of countries and commodities they had to processes, as well as the ever increasing range of HTS (Harmonized Tariff Schedule) codes they had to deal with, many of which had confusing sub-classifications that were not well known or commonly used. In addition, whereas accounting had a number of sophisticated accounting systems to choose from on the marketplace, technology solutions for these customhouse brokerage providers were almost non-existent. In effect, proper classification depended on the expertise of the human classifying the data – which leads to errors, all of which are costly since they will result in delayed clearance, fines, or undetected overpayments – the last of which the government is not looking for on your behalf.

How could this happen? Many categories have subcategories. Consider 3703.10, photographic paper. It’s US HTS rate is 3.7% unless it’s 3703.10.60, Other (not falling into the .30 category of rolls exceeding 610 mm), and then its 3.1%. If you were unaware of this special subclassification, or simply left off the .60, you’d be paying 0.6% more. Another common error is a mixed shipment where a rushed or lazy agent simply uses the high level four digit code in a mixed shipment. If the majority of the shipment was at a lower rate, or was subject to reduced rates because of a free trade agreement or free trade zone, you could be considerably overpaying. And if you’re importing 50M and overpaying 2%, that’s 1M you’re losing.

So what can you do? Up until recently, the best you could do is subscribe to a service that kept up-to-date rates and manually verify each shipment against the rates, which required lots of manpower and might cost more than you save if you are a mid-sized company or smaller. Today, there are technology solutions to assist you. One such solution is that offered by Global Data Mining, a company that specializes in helping high-volume, high-value global trade businesses build effective trade databases for extensive trade reporting and comprehensive auditing to significantly improve their processes, reduce their error rates, and save time and money in their global trade endeavors.

Earlier this week I had a chance to speak with the president of GDM, and the president of their sister company, International Trade Bureau, and I must say that I was impressed with their knowledge of the issues in the global trade space and their processes and solutions for addressing them. Although they do not provide a complete solution on their own, with the right internal team and consulting partners, the foundation their solutions provide will allow you to address your trade issues end to end. How? That’s a topic for a later post.