Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 20 August 2006

Established Procurement Service Providers focused on sourcing are usually market leaders that have a number of inherent advantages which include a larger supply base, higher levels of expertise in niche categories, and the ability to aggregate spend on a larger scale. In addition, they can often tap more economical labor sources in regional markets and implement new sourcing processes and technologies more efficiently.

A PSP reduces the headcount you need to perform certain manual and tactical processes or to manage certain indirect or non-strategic categories that are not a core competence, freeing up your purchasing team to spend a much greater percentage of their time on strategic activities and strategic categories and generate a larger return on your investment in them.

What should you do to prepare?

Managed properly, a relationship with a PSP is very beneficial. However, before you enter into such a relationship, you need to prepare for success.

The very first thing you need to do, even before you make the decision on whether or not to outsource part of your procurement function, is to gather data on the current state of your procurement practice. Do a spend analysis by category and location to determine high-volume vs. low-volume categories. Work with product development to determine strategic vs. non-strategic commodities. Understand your transaction volumes and associated processing times. Document your processes and average sourcing times by category. Determine what currently falls under procurement, what does not, and what should.

The next step is to analyze this data and determine direct and indirect savings opportunities by outsourcing low-volume or non-strategic categories, transaction management, and process execution. Procurement outsourcing only makes sense if considerable year-on-year savings opportunities exist, especially since the greatest savings will not be realized until a year or two into the relationship. Furthermore, a good relationship is driven by a Service Level Agreement (SLA) that specifies mutually agreed upon targets and goals, and incentives for the PSP exceeding those targets goals, and reasonable values for those targets and goals cannot be set unless you have a basic understanding of your current spend and internal performance.

Once you have finished your analysis, you need to decide what will actually be outsourced, what the scope of the arrangement will be, how the responsibilities will be split, and how the relationship will be managed. A governance council will need to be established to maintain control over what is being outsourced and monitor performance and compliance. The council will be key to aligning stakeholders and insuring a single cohesive message is always delivered to the PSP.

A single senior executive needs to take responsibility, coordinate the deal to the point of closure, and oversee the initial implementation. The executive is also responsible for making your employees aware of the plans, overseeing the creation of the transition approach and timing, and explaining the benefits to the procurement function and the organization as a whole.

What should be in the SLA you mentioned?

One of the keys to success, the SLA must define a formal governance and oversight structure, risk-and-gain sharing policies, staffing parameters, operating specifics, and response times. It should be based on key metrics, and measurements against these metrics should be taken and communicated regularly. It should include incentives for exceeding targets and penalties for sub-par performance. It must allow for bilateral transfer of methods, processes, and knowledge and encourage continuous process improvement.

And in conclusion?

Once the SLA is nailed down, the specifics of the relationship need to be addressed. It should be a multi-year agreement, I would recommend at least two or three, with proper incentives, a well defined governance model, appropriate categories and risk management processes, and methodologies for the transfer of best practices. It should also identify and account for any important or relevant legal issues up front to prevent issues down the road.

Remember that the most significant benefits often do not materialize until the second or third year of the relationship, when it has matured to a smooth, natural process and that it takes time to collect enough data to not only measure performance and results, but improvement.

Make sure to not only link the agreement to explicit benefit targets, and continuous, step-change performance improvements, but to include rewards if the service provider exceeds those targets. Incentives drive everyone, partners included.

Then, when the contract is in place, measure performance regularly, insure issues are escalated when appropriate, and confirm that spend visibility is available to your users. Transfer best practices on a regular basis and work together for continuous improvement.

The measurements should include, but not be limited to, Savings Targets, Process Compliance, Supplier Compliance, Supply Base Consolidation, On Time Delivery, Transaction Accuracy, (PSP) Staff Retention, and Quality of Service.

For more information on procurement outsourcing, see the “Procurement Outsourcing: A Brief Introduction” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 19 August 2006

The Procurement Service Provider (PSP) landscape can be confusing, with a host of providers coming from many different backgrounds. You have traditional business process outsourcing and IT outsourcing behemoths that have invested in procurement skills, recent startups with procurement outsourcing as their sole vision, and specialist firms that concentrate on a handful of related spend categories. The result is a cloudy map of skills and capabilities ranging from transaction focused providers specializing in automation, through category specialists to comprehensive procurement service providers.

Considering that value comes from selecting the right partner with the right skill set, expertise, and experience to match your needs, it is very important that you can properly evaluate your options and choose the provider that is right for you!

So how do you identify a good PSP?

A good PSP will have access to the latest web-based e-tools, use a center-led procurement model, be driven by operating metrics, and have tools and processes in place to closely monitor compliance. It will also have a significant number of sourcing and category experts on staff who are up to date on best practices, experienced in your industry sector(s), and engaged in regular training and knowledge sharing endeavors designed to ensure they maintain world-class status. It will be based in a robust purchasing facility with integrated process and co-located teams, already have a pre-existing supplier network and supplier intelligence in your categories, extensive change management and knowledge transfer capabilities, and the flexibility to change as your corporate goals change.

Furthermore, the PSP will have a number of referenceable long-term customer relationships where they have been providing comprehensive spend management services across a significant number of companies and categories with a track record of success across industries, a solid balance sheet, a growth plan, and a commitment to maintaining operational excellence in procurement. Procurement will be its primary, if not only, focus.

What should you outsource?

Procurement outsourcing normally generates the largest returns when applied to non-strategic indirect categories and direct commodities of limited strategic value. In addition, it generates the largest return when the PSP has enough volume to identify significant savings opportunities. Therefore, you need to select a PSP that will allow you to go beyond simply infrastructure transfer and process support. (However, you should remember caution and not to go too far with your outsourcing initiative, since strategic sourcing dictates that you manage strategic categories carefully.)

Indirect purchases are ideal for procurement outsourcing because they are typically transaction driven, not part of your core business, and so varied that they generate considerable process inefficiencies for your staff, especially when most of your information systems will be designed for your direct categories. Furthermore, due to the sheer number of categories and variations therein, most of your buyers will lack the time and means to apply best practices such as cost breakdowns and benchmarking to these categories. Thus, a PSP with the right skill sets could be invaluable.

For more information on procurement outsourcing, see the “Procurement Outsourcing: A Brief Introduction” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 18 August 2006

Simply put, procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party.

Why should you consider procurement outsourcing?

It is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably then those who do not. When done right, this is especially true for procurement as it can generate additional value through sourcing and compliance savings as compared to the savings opportunities from most outsourcing arrangements, which are generally limited to efficiency improvements and headcount reductions. In addition, it is a transformational type of outsourcing where a portion of the savings generated from an initial endeavor can be used to finance and expand the transformation.

One reason to outsource would be if the procurement of certain categories, such as indirect or non-critical materials, or the management of certain procurement processes, such as requisitioning and compliance tracking, were not core competencies since outsourcing provides an opportunity to increase efficiency, lower costs, and increase savings. Outsourcing in these situations is often much more economical than trying to build the competence internally.

Another reason to outsource is to keep your top performers happy. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.

A final reason to outsource would be if procurement is an area that, if managed properly, could drive significant value to your business but it is not an area you plan on investing significantly in or increasing focus internally. In this case, you could consider full spend management outsourcing, but it is not something we would recommend unless you were in an industry where all goods and services procured on a regular basis were non-strategic indirect or commodities. A hotel chain would be one example of a firm where full spend management outsourcing might make sense as the vast majority of goods and services procured on a regular basis are commodities.

How does procurement outsourcing work?

There are essentially three basic levels to the outsourcing of procurement functions: infrastructure transfer, tactical process transfer, and strategic category transfer.

At a basic level, you are moving or augmenting staff, technology, systems, and supplier management to or with the PSP. At the next level, you are moving certain processes, such as requisitioning or procure-to-pay, that are easily automated and tactically oriented. At the highest level, you are transferring responsibility for entire categories and expecting the PSP to undertake strategic sourcing initiatives with respect to those categories.

At a basic level, the PSP will manage e-Procurement systems that automate and streamline manual purchasing processes and transactions and provide you with improved spend visibility, compliance, and process efficiencies. At a higher level, where you transfer tactical processes and control of indirect or commodity categories, the PSP will support day-to-day activities in supplier management, order and pricing compliance management, and policy enforcement and provide you with improved services levels and reduced costs. At the highest level, where you transfer strategic categories or full spend management, the PSP will provide on-going end-to-end strategic management of these categories, implement strategic sourcing best-practices, and drive continuous process improvements that should eventually lead to significant cost savings, or cost avoidance if raw material prices are steadily increasing in your commodity categories.

What results can you expect to see?

The value associated with procurement outsourcing is extensive. In addition to the year-on-year cost savings documented by numerous studies, obtained by way of the PSPs in-depth market knowledge and volume aggregation capability, you maximize your return on your existing procurement capability by freeing up your professionals to focus on your most strategic categories. You reduce cycle times and increase the capabilities available to your users, but, most importantly, you provide your users with total indirect spend visibility as a PSP will be able to benchmark practices and prices and apply a standardized process to each category it manages.

In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.

Aberdeen also found that 43% of enterprises already outsourced select procurement processes or spend categories and that an additional 15% planned to outsource procurement functions by 2007.

For more information on procurement outsourcing, see the “Procurement Outsourcing: A Brief Introduction” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 13 August 2006

Friday we introduced you to the concept of center-led procurement, where a procurement center of excellence (COE) centrally creates and coordinates strategic purchasing decisions across the enterprise and yesterday we discussed the role of the procurement COE and some of the challenges in its initial creation. Today we discuss some best practices for getting the most out of your procurement COE.

(1) A Chief Purchasing Officer (CPO) or Chief Supply Chain Officer (CSCO) on the executive team leads the COE

This insures that plans, and initiatives, are aligned with the business, diverts resistance, and helps bring each of the different business units on board quickly.

(2) Cross Functional Teams

This insures that the right knowledge is in place to make the best decisions from a strategic and best practices viewpoint.

(3) Multi-Year Supply Plans

This promotes better alignment and integration with your strategic supply chain design and helps establish the center as a strategic leader in key commodity categories.

(4) Coordinated Metrics and Incentives

Each unit needs to have their performance analyzed off of the same metrics, linked to actual value creation, and the incentives of each unit need to be tied to these metrics. Everyone wins or no one wins. This insures that procurement, as the biggest potential contributor to cost savings, maintains a central role in the organization and that everyone sticks to the mutually agreed upon strategies and policies.

(5) Web-Based Automation and Decision Support Tools

They allow you to accelerate the transition to the center led model and extend sourcing activities to the desktop of every stakeholder in your organization while enforcing corporate policies and processes.

(6) Ongoing Education

Keep up to date on the latest trends and success stories and share best practices and methodologies with each unit of the organization on a regular basis.

(7) Speak to the supplier community with a central voice

This helps you fully leverage your spend opportunities and facilitates shared process improvements. Furthermore, this will help you select and integrate a key group of suppliers into the product design and specification process. Strong supplier management will allow you take full advantage of supplier performance and this will lead to better quality, faster product introduction, shorter cycle times, and more value from the relationship.

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 12 August 2006

Yesterday we introduced you to the center-led procurement organization that blends key category spend leverage, process standardization, and knowledge sharing of centralized organizations with the empowerment, execution, and fast reaction times of decentralized organizations that are able to take greater advantage of their local markets and resources on which they are more knowledgeable. Tomorrow we will discuss some of the best practices of center led organizations but today we will describe the role of a procurement center of excellence and some of the challenges in its initial formation.

The role of a sourcing professional in a center of excellence (COE) following the center-led model of procurement is a challenging one. You must develop commodity strategies and sourcing policies that leverage the expertise and best practices of the enterprise and guide all buys for each affected category and, when appropriate, negotiate master contracts without specifying the individual buys or pull patterns of each of the business units. You must define, identify, and oversee the implementation of technology solutions that enable the automation of tactical aspects of purchasing at all levels of the organization without infringing on existing IT systems or processes or complicating the lives of the purchasing professionals in the individual business units. You must educate the organization on the importance of not only common processes, but of maintaining complete, consistent, and up-to-date quality data on which real-time reports can be generated that will allow you to measure savings, compliance, performance and detect any significant deviations that might need to be dealt with at the unit level or the center level.

The transition to a center led model will be full of challenges, but given that center-led companies typically report 5% to 20% cost savings for each new dollar of spend brought under management, it will be worth it.

Most of the challenges fall into the usual people, process, and technology triumvirate, with the measurement challenge encompassing all three.

The people challenge is significant. The first thing you have to do is identify the right people with the right skill sets to lead the organization and the category teams that the COE will need to create. Combined, this team will need to have engineering, finance, management, and leadership skills in addition to traditional purchasing skills. Furthermore, the leader, which should be a CPO (or CSCO), should have enough experience to bring it all together. You may not be able to locate the necessary talent internally and may need to recruit in an increasingly tight skills market.

Then your core team needs to build cross-functional category teams that include key representatives from all major geographies, business units, and key suppliers with whom you have strategic relationships. They have to teach these teams to speak a common language and work together as a cohesive whole.

The process challenge is significant as well. You are switching from a single operational model of purchasing to a framework that supports multiple models, depending on the best strategy for the category or specific commodity. Some commodities will be leveraged and negotiated across the enterprise in a centralized model, some commodities will be negotiated centrally but sourced locally in a mixed model, and some commodities will be sourced locally in a decentralized model, all depending on what the center of excellence decides is the best approach for that commodity. For example, a food service chain might source condiments globally, meat regionally but with local exceptions (as per health regulations), and building maintenance locally.

The technology challenge is simultaneously easy and daunting. You know you need to automate routine transactions and processes to allow you to focus more on strategy, analysis, and managing exceptions but the sheer number of technology providers and solutions can be daunting. Furthermore, you have to work closely with your IT department to reach a seamless and fully integrated source-to-settle infrastructure that fully mirrors the best practices that you have defined. However, the effort is more then compensated by the reward. According to the recent Aberdeen report, more than 80% of the Fortune 1000 companies that have adopted web-based sourcing and requisitioning tools have reported double digit cost savings, enhanced process standardization and knowledge sharing, and dramatic improvements in compliance and process efficiencies.

For more information on center led procurement, see the “Center Led Purchasing: The Procurement Organization of Tomorrow” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].