Daily Archives: January 26, 2011

Hidden Savings in Outsourcing Invoices

Global Services just ran a great article on “9 ways to find hidden savings in your outsourcing invoice” that is quite useful if your organization has just begun its outsourcing journey. A good Supply Management Organization knows that invoices often represent a great cost reduction opportunity. But invoices from outsourcing providers have additional opportunities for savings above and beyond the norm. These additional savings opportunities include:

  • secret offshore staff
    you might outsource your support to an organization that, in turn, offshores the work; you could be paying 60K a year for a 30K resource; be sure to get lists of all resources assigned to your account and their associated rates to make sure you are being billed accordingly
  • temporary labour
    not only might the rates be higher than contracted rates, but the charges, even if the rate is correct, might be for work that is not chargeable — for example, a provider behind on a task might hire temporary labour to catch up, but if the task is a fixed-cost task, it should not be billed by the hour
  • shelfware
    is the organization (still) being billed for software that is not being used
  • pass-through expenses
    are all of the pass-through expenses valid? if approvals are required, were they pre-approved?

And these are just the tip of the iceberg. Be sure to check out “9 ways to find hidden savings in your outsourcing invoice” for five more — because outsourcing only saves money if it costs less to outsource than to do it in house.

Next Generation Sourcing

As stated in yesterday’s post, for Sourcing to continue to have an impact in a modern Supply Management organization, it needs to be taken to the next level. And I’m not just echoing the statements of The Altimeter Group, AMR, CAPS, Greybeard Advisors, The Mpower Group, Purchasing Practice, or my own persistent ramblings over the years (as I have been pushing for Total Value Management and Next Generation Sourcing strategies since day one). A modern supply management organization truly needs to take their sourcing practices to the next level if they are going to continue to distill value from Sourcing.

When you consider that:

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), or additional demand (that increases the economy of scale).
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no more on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no more off-contract leakage to be stopped.
  • And once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker.

As a result, in order for a mature Supply Management organization to continue to extract considerable value from (e-)Sourcing, e-Sourcing needs to be taken to the next level. Whether you call it DDSN2 (Demand-Driven Supply Networks), Next Practices, or Total Value Management, the message is the same. Take your Sourcing to the next level, or risk decreasing returns.

So where does one start? Upgrade or bring in a modern e-Sourcing platform. For some organizations, who are already using a top-tier provider and who have purchased a suite license, this will just mean learning how to take full advantage of the end-to-end integrated functionality and improving processes. For others, using point solutions from top-tier providers, this will mean buying licenses to the whole suite and/or integrating the point solutions with other solutions they already have. For the market majority, this will likely mean either replacing existing first generation systems (from providers who haven’t made any updates to the base functionality in the last five years) or, in laggard cases, skipping first generation e-Sourcing systems entirely and starting off with modern systems that have better, integrated, functionality.

And then, once these systems are in place, processes are updated to capture more data and consider more information in sourcing decisions, in a process that one vendor on the leading edge likes to call High Definition Sourcing.

Since this process is the closest to what Sourcing Innovation believes is necessary for organizations that want to take their sourcing to the next level (and, in the words of CAPS, become value-focussed), this will be the subject of the next series of posts (starting next week). Stay tuned!