A strategy used by many Sourcing and Procurement organizations to get quick wins is to outsource tactical Procurement operations and/or Category Management to BPOs or expert (niche) consultancies. This can be very successful if the BPO is reasonably efficient in processing compared to the organization or if the expert (niche) consultancy has considerable expertise and can quickly find a lot of savings the organization never could. But that doesn’t mean that you are getting the best value. These organizations are trying to maximize their profit, and if you’re happy with the value you are getting, why should they try to optimize their costs?
Before we continue, let me be specific here — we are NOT attacking the hourly rate for their (top) talent. Good category managers are worth their weight in platinum, and you should expect to pay top dollar for them. But you should also receive top value in exchange, not mid-level value and definitely not mediocre value. But that’s what you could be getting if you are not evaluating these services as closely as you would be evaluating your strategic direct material buys.
And, before we continue, let’s make it clear that while we are focussed on Supply Management, these hidden costs could be found in any outsourcing arrangement — marketing support, legal support, engineering support, etc. So what are the hidden costs?
- Rate Markup this can take many forms, including A rates for B staff or onshore rates for offshore staff; you could be paying 200/hour for the expert, but a relatively inexperienced mentee could be doing most of the work, or you could be told you are being supported on-shore when really 90% of the work is being offshored to low-cost locales in Eastern Europe
- Temporary Labour if the provider falls behind, they might hire temporary labour and bill you for it; this is okay if you ask them to, but if they do it without your permission for a fixed-cost task, this is definitely NOT ok
- Shelfware/Bloatware where you are being billed for software not being used or you are being billed for a suite license when the organization is only using one module
- Pass-through Expenses some organizations will try to pass through any and all expenses they think they can, even if they require explicit pre-approval or the contract says they are the responsibility of the outsourced company
- (Hiked) Commissions some organizations will charge-back a percentage of savings, a value fee for a successful value-add negotiation, a percentage of a recovery, etc. this is usually okay as this is usually part of an agreement, but there are usually restrictions — minimum value, maximum percentage, and so on; sometimes an organization will charge commissions beyond what they are allowed to
- Taxes some organizations will charge taxes based on their locale, taxes you may not be technically required to pay — double check the tax lines carefully
And these common overcharges could be just the tip of the iceberg. So be sure to be as cognizant about sourcing your services relationship as you are about sourcing your strategic products and services.
In our last post we noted that there’s no single right answer or easy answer here. It’s very situational. We also noted that some consultants will always tell you to start with Sourcing, while others will tell you to always start with Procurement, even though it will often be a chicken and egg situation. You need to score big wins, and that requires Sourcing. But to pick the right categories, you need good data to analyze, and that requires Procurement. But that doesn’t take into account that sometimes the best starting point is SRM or CLM for an organization where the most benefit can come from supplier development (because the organization is locked into strategic suppliers) or CLM (because compliance is key to cost, and brand, control).
So where do you start?
It’s very situational dependent, but your biggest issue should drive it. So if you think your biggest issue is that:
- you can’t do enough sourcing events
start with e-Sourcing
- you’re events are generating limited returns
use decision optimization with extensive models that factor in all known direct & indirect costs and even costs of capital
- you can’t find the right suppliers
start with a modern SRM platform that integrates with a true supplier network for granular supplier discovery that takes a plethora of business needs into account
- you have to (quickly) ensure compliance with a newly introduced regulation
start with a CLM platform with embedded semantic-based / deep learning analytics that can quickly scan thousands upon thousands of contracts and determine those in compliance, those not, and those that need to be manually reviewed (due to the presence of non-standard clauses, enforcements that appear to be country specific, etc.)
- your over-spend, and need for audit recovery, is too high
start with an I2P solution with m-way matching (contract, PO, Goods Receipt, etc.)
- your maverick spend is too high
start with e-Procurement / P2P with an embedded catalog (with visual-guilt driven guided buying), flexible requisition & approval processes, and no-PO / no-Pay enforcement capability
- you need to get your services spend under control
start with a Sourcing platform with a VMS/CWM module or a VMS/CWM solution that can integrate with a BoB S2P solution
- you are unsure of where your best opportunities lie
start with a modern spend analysis solution with integrated prescriptive analytics that can go deeper than just top N
In other words, you let the issues drive the starting point. After all, we all know what happens if you try a big bang implementation and take on the entire extended S2P process at once … the project goes up in a big bang and you risk ending up as one of the top supply chain disasters of all time (especially since everything will need to talk to the ERP)!
There’s no single right answer or easy answer here. It’s very situational.
Some consultants will always tell you to start with Procurement because:
- you get manpower and transactional savings immediately
- you will get the majority of your spend properly categorized in ONE system (which will enable better spend analysis and opportunity selection later)
- you will stop overpaying and duplicate paying invoices with 3-way matching and reduce recovery requirements
- you will reduce cycle times and be able to take advantage of early payment discounts
- and so on …
Some consultants will always tell you to start with Sourcing because:
- you can invite and compare more supplier bids with modern RFI tools
- auctions are a great way to realize a quick category price reduction
- timeline reductions allow you to source more spend
- portal-backed SIM makes it easy to keep track of suppliers and contacts with up to date information
But this doesn’t take the chicken and egg situation into account.
- you can’t identify significant savings without a modern optimization-backed platform-backed sourcing solution that allow you to identify new opportunities, which means you need to start with a Sourcing platform if you need savings fast
- but you can’t identify the best categories without good data, which is captured in a good e-Procurement/P2P system, which means you need e-Procurement to capture the data you need to identify the right opportunities (using spend analysis in the sourcing platform)
Or the fact that the biggest savings opportunity for your particular organization might be a best-of-breed niche SRM or CLM solution due to your biggest savings opportunities lying in supplier development or compliance.
So where do you start? Stay tuned for Part II.
SI has been about next generation sourcing since the day it began. No matter how good you think you have it now, it’s not good enough. Why? Most of you are still on last decade’s sourcing platforms which, especially if you never had anything like them before, is a great start (and maybe beyond your wildest dreams if you were in e-mail and spreadsheet world), but not good enough. What you are going to find out, as SI told the Procurement leaders seven years ago today in its post on Next Generation Sourcing, all good things come to an end.
As we noted for those of you with first generation and early second generation systems,
- 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), additional demand (that increases the economy of scale), or a more powerful optimization model is provided.
- 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 little 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 little off-contract leakage to be stopped.
- 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
And, more importantly, for those of you with later second generation systems:
- Once a SIM with a powerful supplier portal and information / (compliance) documentation monitoring and alerting system is put in place, there is no additional time savings from information maintenance offloading.
- Once a SPM which automatically collects organizational data and metrics is put in place, there is no additional time savings from automating supplier scorecard production.
- Once a SRM with proper corrective action requests / corrective action monitoring and integration system is put in place, there is no additional time savings from quick-and-easy semi-automated resolutions.
- Once an audit recovery system is put in place that not only 3-way matches invoices but identifies when rebate or discount targets are hit and automatically applies the discounts to current and future invoices, there is no more savings from high-priced audit recovery services.
- Once integrated contract negotiation and e-Signature is implemented, there is no more process time savings from being able to track all updates by both parties and do sign-offs quickly.
- … and so on
At some point, your year-over-year returns will start to trail off … somewhere between the three and five year mark, depending on how much spend you are able to put through managed sourcing events every year and how much you are able to use the system to support it. So don’t stand still. Start identifying your biggest weaknesses and looking for the next generation system to address them when the opportunity costs of not taking advantage of the opportunities you are missing gets too high.
So where do you start? Stay tuned.
Three Hundred and Sixty Five Years ago today, the city of New Amsterdam (later renamed the city of New York), is incorporated.
One Hundred and Forty Two Years ago today, the National League of Professional Base Ball Clubs was formed in New York, and America’s favourite past-time was cemented. (It replaced the National Association of Professional Base Ball Players that was formed in 1871 and ceased in 1875, which succeeded the National Association of Base Ball Players, which was founded in New York in 1857 and was the first organization governing American baseball.)
One Hundred and Five Years ago today saw the opening of Grand Central Terminal.
Wall Street New York is pretty much the centre of American Finance, and there are no supply chains without money to fund the people who run them.