In Spite of Ourselves: Procurement’s Curious Contradictory Behavior


Today’s guest post is by Anthony Mignogna, a Director at Source One, a Corcentric Company. He provides clients with expert, end-to-end support for their procurement software investments. Leveraging years of experience working with mid-market to the Fortune 1000 companies, he empowers procurement organizations to identify opportunities to better leverage technology, assess the software landscape, select best-fit solutions, and implement them to meet their business objectives.

“Numbers never lie.” It’s a popular saying that’s also far from true. In fact, numbers are often most interesting when they call the truth into question.

You can observe a few good examples of this phenomenon in Deloitte’s most recent CPO survey. Rather than painting a clear picture of Procurement’s path forward, the survey results suggest a function that’s uncertain of how it should proceed. CPOs, it seems, are eager to use the survey (and its numbers) as a way of lying to themselves. This is particularly true where talent and technology are concerned.

Though a majority of respondents suggest these are areas of concern, a shocking few report they’ve acted on these opportunities. Let’s take a closer look.

Talent

If you’ve attended a Supply Management conference this decade, you’ve attended a handful of sessions on the ‘talent gap.’ As more and more organizations invest in managing the cost side of their balance sheet, demand for procurement talent is far outpacing the available candidates. This is complicated further by the evolving set of skills and experiences we expect Procurement professionals to leverage. Based on the survey, roughly half of CPOs don’t believe they have the right talent in-house or the resources necessary to find it:

  • 51% of procurement leaders believe their current teams do not have sufficient levels of skills and capabilities to deliver on their procurement strategy.
  • 47% of procurement leaders found it more difficult to attract talent in the last 12 months

Alone, those numbers aren’t especially surprising. What’s interesting is the way they fly in the face of logic CPOs love to employ. Procurement often stands firmly on the buy side of the make vs. buy discussion, but that goes out the window where investing in talent is concerned. Procurement seems totally unwilling to take its own advice:

  • Levels of procurement outsourcing have dropped to 10%, the lowest level in over 5 years.

If you don’t have the talent to support your organization’s goals, and you can’t find that talent externally, outsourcing to organizations capable of scaling and focusing resources seems like an obvious path forward. It’s debatable why organizations it’s still an unpopular path. Are the nearly 50% of organizations that struggle with talent simply failing to consider all of their options, or are CPOs too focused on tactical, day-to-day operations to even consider pursuing more strategic initiatives.

Technology

If one topic trumps talent, it’s technology. Conference agendas, blogs, podcasts, and whitepapers are loaded with questions and suggestions around the incoming digital revolution. The conversation is inescapable. From eSourcing to AI and everything in between, technology is on the top of minds and tips of tongues for Procurement. Identified as a solution to inefficiency, poor visibility, low ROI, and perhaps even the talent gap, software looks like a magic bullet. Deloitte’s survey results support this. They indicate that CPOs are betting big on the promise of new solutions:

  • Two-thirds to three-quarters of organizations surveyed are leveraging digital technologies along the source-to-pay continuum to some extent.
  • The rate of digital technology adoption among organizations is highest in the P2P process, followed by sourcing and tactical buying.

Again, this is not especially surprising, particularly when you consider that most of the pain points cited in the survey are closely related to technology. Two statistics, however, jumped out. Like the talent findings cited above, they suggest the numbers don’t tell the full story:

  • Only 3% of Procurement leaders believe their staff possess all the skills required to maximize use of digital capabilities.
  • Only 6% of Procurement leaders believe their digital strategy will help them fully deliver on their objectives.

Suffice it to say, there is no amount of statistical error tolerance that can make 3% and 6% look like a significant chunk of the survey’s respondents. Juxtaposed against Procurement’s enthusiasm for new technologies, these statistics are especially alarming.

Again, the paradox could point to one of a few issues. Maybe it’s just a symptom of the talent and skills shortage. On the other hand, it might simply point to flaws in the way Procurement views technology. Expecting an antidote to cure all of their ills, they’re finding something less exciting. It appears that CPOs are good at speculating about technology and even good enough at purchasing. When it comes to building the necessary ecosystem to build a compelling business case and support implementation, however, they fall flat and realize disappointing results.

The survey results suggests that 9 in 10 CPOs are opting for the status quo – and they know it. It might be time to break the trend and give outsourcing some thought once again. Maybe then our actions will match our ‘priorities’ and the numbers will start to tell the truth.

Thanks, Anthony.

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 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.