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 third party consultant to help you make that decision.

By now, 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.

That’s 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 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 you check 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 our conclusion to this series.

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
• the next instance of 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 it passes the sniff-test, then you can seriously consider the categories and 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.

In our last post, we noted that the findings of a recent Source One Management Services survey (summarized in Part I of a 4-part series on how Companies Face Limited Procurement Resources that is available on their website) indicate that 1 of 3 procurement departments is understaffed. Ouch!

We further noted that this had three definite repercussions.

1. You’re not doing enough analysis.
2. You’re not sourcing enough categories.
3. You’re not finding new sources of value.

So what can you do?

At a high level, you can either do something or you can do nothing. Assuming you choose to do something, you can do it internally, or you can do it externally. If you do it internally, you can add staff or augment staff. If you do it externally, you can augment staff or outsource. If you can outsource, you can outsource projects or outsource categories / commodities to a GPO. In other words, your 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, that’s not the answer. You’ll just get more budget and staff cuts. And even if you can get approval to hire more staff, that might not be the answer in the short term. It takes time to ramp a new hire up to speed, and what is given may be taken away even quicker if you don’t get results.

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.

First things first. The findings of a recent Source One Management Services survey (summarized in Part I of a 4-part series on how Companies Face Limited Procurement Resources, available on their website) indicate that 1 of 3 Procurement departments is understaffed. Ouch! With costs climbing and GDP growth (and, thus, consumer spending) flattening, this is not a good thing. For many companies, their only option for growth is cost control and value generation through Supply Management. (Note that we are claiming cost control and not cost savings because, now that inflation is back with a vengeance, with hyper-inflation lurking around the corner, there is no such thing as cost savings, just cost control.)

So what does this mean?

1. You’re not doing enough analysis.
   Analysis takes time. More time than just dumping your AP and P-Card databases into a spend analysis tool and running the canned top-n spend reports by supplier, category, department, etc. As per our recent post on Spend Analysis – How Do You Get It Right, real savings comes from real insight which requires real analysis, which takes time, effort, and focus.
2. You’re not sourcing enough categories.
   If you’re short-staffed, you’re going to focus on the top n suppliers, categories, departments, etc. spit out by the canned reports from your spend analysis reporting tool. Some of these will have opportunities, but since you’ll already know most of these opportunities, you’ll miss many of your biggest opportunities, which are typically found in the high-opportunity tier-2 categories that never get addressed due to lack of resources.
3. You’re not finding new sources of value.
   The future of Supply Management, in an inflationary economy, is value-generation. Cost control is a good start, and in an organization overspending by 5% to 15%, it will make a big impact in the beginning. But once all of the fat is trimmed, the best you can do is reign in costs. This means that the next round of savings is going to come from identifying value-generation opportunities. Bundling and unbundling the right value added services for your organization; helping engineering identify more cost-effective alternate materials and production processes that are also more environmentally friendly, and may let you charge a sustainability premium; and identifying new market opportunities based on products and services your strategic suppliers could provide you with can all bring value to your organization.

Now what? We’ll address that in Part II.