Category Archives: Outsourcing

It’s Time for the Return of Purchasing Consortiums …

… but not the kind you think!

In the good ol’ days, before everyone had access to cheap and easy e-Auctions (when inflation was low, delivery guaranteed, and supply outstripped demand) or on-demand RFX sourcing platforms, the answer to better “purchasing” was consortiums that pooled demand and negotiated lower costs (hopefully lower landed costs, but you took what you could get). Except in a few industries (like healthcare, where product requirements are highly regulated, or utilities, where manufacturing requirements are exact), these have all but disappeared with the rapid rise in modern sourcing, procurement, and source-to-pay platforms over the past two decades.

While this may have appeared to be for the best, as you lost control over who you bought from, a third party controlled the relationship (and you couldn’t always go direct to get problems resolved), and you had to pay them a pretty golden penny for their problems, the pandemic has shown us that this is maybe not the case. Even though you want to control you purchasing as a buyer for your organization, you need reliable supply … and the pandemic has demonstrated (what many of us new, and blogged, about a decade ago; search the archives) that when you are outsourcing halfway around the world, reliability is a myth.

You need nearshore supply that you can easily get by truck and, preferably, train for large shipments (as modern trains can be more environmentally friendly from a GHG perspective), but every since McKinsey and the Big X (5/6/8/whatever) analyst companies that followed told you to go China, not only did you put most of your home-grown manufacturing plants out of business (which, I’m sad to say, wasn’t always as big of a loss as whiny politicians would have you think and definitely didn’t nail the coffin shut, but that’s another post), but you also put many near-shore manufacturing plants in Mexico (and other Central, Latin, and South American locations) out of business (which did!).

They needed to be resurrected the day pandemic restrictions started relaxing, and every day the need for their reactivation (and modernization) / replacement gets worse!

But unless you are a Fortune 100, you don’t have the spend on your own to convince anyone to even think about restarting a factory somewhere closer, more reliable, and safer. (And even then, the risk equation is not any better than continuing to outsource to China and hoping for the best!)

That’s why we need a return of the Purchasing Consortium, but with a new mandate to not only pool and guarantee enough demand to keep a new(ly) (revived/modernized) manufacturing operation sustainable and profitable but, in the absence of anyone in the target location willing to take the startup risk, manage a multi-shareholder investment on behalf of the Global 3000 parties that need such an operation and can afford to invest in one!

It’s a win-win regardless of whether or not anyone is willing to buy the operation once started. Either someone steps in and takes it off of the consortiums hands, giving the initial investors a return on their investment in addition to guaranteed supply, or the investors, who maintain control, can keep purchasing costs down (and the potential for profits up).

The question is, besides companies like Apple and Microsoft that can afford to build their own chip plants near shore (because what else are they going to do with the Billions they have in the bank?), who else is going to step up and bring it back to where it should be.


(Now, before you go bashing the grumpy old analyst for China bashing, this post is not about China bashing [although that’s a great rant topic], it’s about the insanity of going halfway around the world for something you can get [close to] home. If you’re selling in Asia, you should damn well be manufacturing in Asia, as it would be insane to manufacture something in Mexico and ship it to China if it’s easy to manufacture in China!)

You’re Understaffed. And You’re Not Alone. Now What? Part III (Updated)

Now that we’re in Part III, the doctor is going to tell you that even if you’re in the 2/3rds of Procurement Organizations that do not think you’re understaffed, you are. Even if you have enough headcount, chances are you do not have enough skills to tackle each category and project to the maximum potential as each staff member in your department is only human, and can only master a limited number of categories in a job where you are expected to be a jack-of-all-trades. The only question is are you slightly understaffed or significantly understaffed?

If you’re significantly understaffed, you’re going to have to augment externally as there’s no way you will be able to handle a large influx of internal staff, even if they are temporary and category/service experts, as they still have to be trained on your organizational procedures and policies, guided towards optimal outcomes for your organization, and managed.

If you’re moderately understaffed, it’s often a toss-up that comes down to your particular needs and the strength of the options provided to you.

If you’re slightly understaffed, you might just need one or two more resources internally to reach your potential, but you still might want to consider outsourcing if the appropriate talent is not available to you or it’s easier to get budget approval if you outsource a project to a services provider.

So, if you think outsourcing is a reasonable option, how do you make the decision?

First of all, you make sure that outsourcing is a viable option. The best way to start is to apply a sniff test and make sure that the proposed projects don’t suffer from the 10 ailments of outsourcing, as presented in a presentation by Andrew Downard (of AD Supply Chain Group) and Karl Manrodt (of Georgia Southern University) on Delivering Better Service, Lower Costs and Increasing Innovation Through Vested Outsourcing, and make sure there are no hidden gotchas waiting to jump out and bite you in the backside.

As per the presenters, and a co-author of Vested Outsourcing, you need to make sure that the proposed project is not:

  • Penny-Wise and Pound-Foolish
    and being considered for outsourcing just because outsourcing is expected to be cheaper
  • An Outsourcing Paradox waiting to happen
    because you expect that the provider will do what you tell them to which you incorrectly assume is the best thing to do
  • An Activity Trap
    where the provider is getting paid by the hour or transaction
  • The Next Junkyard Dog
    where you will assign the project to internal experts who will micro-manage the contract
  • The Result of The Honeymoon Effect
    where the provider is getting the work because they just went overboard on the last project
  • Sandbagging
    where the provider is penalized if they don’t deliver a contracted level of effort, but not incentivized for a better than average performance, so the provider will deliver minimalist results
  • a Zero-Sum Game
    where you don’t accept the provider’s preferred terms of engagement, assuming that what’s good for them is bad for you
  • Driving Blind
    as you don’t have any formal governance processes setup to monitor the performance of the relationship
  • Measurement Minutiae
    where you over-measure and under-incentivize the provider
  • Measurement-Free
    although you shouldn’t over-measure, you should measure the results of each project

If the potential Procurement project passes the sniff-test, then you can seriously consider the categories and/or projects for outsourcing, provided you have an appropriate provider with talented personnel. But is that enough to make a decision? We’ll address that in Part IV.

You’re Understaffed. And You’re Not Alone. Now What? Part V (Updated)

You are very well aware that you are understaffed and that you need to do something about it. You’re also aware that you may need to, or want to, outsource your category, project, or staff augmentation requirements. And, after our last two posts, you know that you better make sure that the category or project first passes the sniff test and lends itself to vended outsourcing before you get ready to ship it out.

But you still don’t know if outsourcing is the best decision. How do you determine that? You compare it to your most viable insourcing option. And how do you make that comparison?

Return On Investment

More specifically, what is the ROI of going outside versus staying inside? If you’ve appropriately qualified the project, then you should have an expected return, which you used to determine whether or not the project was incentive-friendly. The base ROI is easily calculated as expected return / expected cost.

The ROI inside will be calculated similarly. What is the expected cost of augmented staff and what return do you honestly think that person will achieve. Remember that, unless that person is a seasoned professional with lots of expertise in that category or project, that person is not likely to achieve the same return as a professional working for an outsourcing provider that tackles that type of category or project day-in and day-out. Plus, as they won’t have the same level of experience, or the same tools at their disposal as an outsourcing professional at the outsourcing service provider, and will have to deal with your organizational politics, policies, and ramp-up, it will take them longer. So even though the hourly rate of an internal resource may be lower, when you consider that more hours will be required for a lesser reward in the average, the ROI is not likely to be as high as you might initially think.

In other words, while an outsourcing firm will always make the argument that outsourcing is the clear-cut solution, it’s not always. If they are willing to put their best on the line and the category or project is suited to them, it will usually be the case that outsourcing is the right decision. But if they don’t have an appropriate expert, it’s going to take them more time to deliver a lesser reward, which you might be able to top by bringing in a hot-shot pinch-hitter for a one-off project.

In other words, there’s no one-size fits all answer and each project will have to be judged on the merits of keeping it in versus the merits of sending it out. And if you need help with that analysis, get a qualified third party consultant to help you make that decision.

You’re Understaffed. And You’re Not Alone. Now What? Part IV (Updated)

Now that we’ve completed three parts, you are well aware that you are understaffed and that you need to do something about it. You’re also aware that you may need to, or want to, outsource your category, project, or staff augmentation requirements. And, after our last post, you know that you better make sure that the category or project passes the sniff test before you ship it out.

Identifying a category or project that will help, and then identifying a company or resource that can do the job, is a good start, but if the outsourcing is going to work, it probably has to be vested. So before you check off outsourcing as a valid option for consideration, make sure it meets the following five requirements for a vested outsourcing arrangement.

  • Outcome Focussed
    A vested outsourcing arrangement is outcome-based, not transaction based. If the project is not focussed on an outcome, such as cost reduction, value add creation, etc., and is merely focussed on transactional invoice processing, it’s not a good candidate.
  • What Focussed
    A vested outsourcing arrangement can define the outcome irrespective of the how.
  • Measurable
    The outcome can not only be clearly defined, but can be objectively measured against a well-defined scale.
  • Incentive-Friendly
    The measurable objective can be used as a foundation for performance incentives to incentivize the provider to perform better.
  • Joint-Governance Friendly
    The category or project lends itself to insight based governance, where you work with the supplier to overcome challenges and obtain better performance.

If the potential category or project checks all of these boxes, then outsourcing is a very viable alternative. But is it your best one? At this point it all comes down to what your insourcing option is.

So how do you make your final decision? We’ll address that in Part V, our conclusion to this series.

You’re Understaffed. And You’re Not Alone. Now What? Part II (Updated)

In Part I we noted that, five years ago, Source One Management Services ran a survey that they summarized in a 4-part series on how Companies Face Limited Procurement Resources that demonstrated the dark state of affairs in Procurement at the time. They found that 1 of 3 Procurement departments were understaffed, and this was not a good thing as costs were climbing, GDP growth was flattening, and availability of supply in certain key raw materials and rare earth metals was diminishing and it took a talented Supply Management team to navigate these chaotic waters. We also noted that, since then, the situation hasn’t improved. Today, 51% of Procurement Leaders believe they do not have the capability in their terms to deliver their procurement strategy. But despite this, 72% of Procurement Leaders are spending less than 2% of their budgets on training. And the need for professionals is six times their availability.

We also noted that, in order to cope with the situation, there were three things you had to advance in an understaffed, undertrained, and overworked organization.

  • Analytics, and not just technologically,
  • Category Sourcing, and
  • Value Source identification.

But that might not be enough on its own. So what else can your Procurement department do?

At a high level, your department can either do something or it can do nothing. Assuming your department chooses to do something, it can do it internally, or it can do it externally. If it does it internally, it can add staff or augment staff. If it does it externally, it can augment staff or outsource. If it outsources, it can outsource projects or outsource categories / commodities to a GPO. In other words, the options are:

  • Do nothing.
  • Hire more staff.
  • Augment headcount with temporary staff.
  • Augment headcount with service/solution provider personnel.
  • Outsource project(s).
  • Outsource categories/commodities to a GPO.

Even though you might think your superiors want you to do nothing, as they give you nothing to work with, and won’t hire more staff, that’s not the answer. You’ll just get more budget and staff cuts. And even if you can eventually get approval for temporary staff augmentation, that might not be the answer in the short term. It takes time to ramp a new hire up to speed, and that which is given may be taketh away even quicker if you don’t get results within the unrealistic time frames set before you.

This says that, in the short term, your best option is typically to:

  • Augment headcount with temporary staff.
  • Augment headcount with service/solution provider personnel.
  • Outsource project(s).
  • Outsource categories/commodities to a GPO.

But the right answer is not always clear. For example, while you might be able to save an average of 10% off of your office suppliers by switching to a GPO, if you are including high cost / high volume items like printers, external storage tapes and drives, and office chairs in your office supplies, you might do better sourcing those separately. If this means that the remaining spend is not enough for the GPO, that might still be okay if you can save enough on the big spending items and just negotiate an x% off catalog pricing on the rest.

And when do you augment staff on your own versus flipping a project to a service provider’s staff? If it’s just muscle you need to get your spending in order and to run one-off analyses to find new options and to make sure spend is put through the system (to get maverick spend under control), then your best option might be to augment internally. But if you need someone to source medium- or high-dollar complex / strategic categories, you probably need some category expertise. Chances are that expertise will be hard to find, expensive, and only needed once every couple of years. Unless the candidate comes with some other useful skills, then you might want to temporarily augment your staff with expert service provider staff.

Tough questions, let’s see what we can make of them in Part III.