I recently stumbled upon “Strategic Sourcing: Measuring and Managing Performance” again, a report prepared by RAND for Project Air Force back in 2000. Barely over a page into the summary, it notes that in managing their relationship, a customer and a provider jointly choose metrics that they believe will support the corporate goals of the customer organization. The goal is that such metrics align the provider’s priorities with those of its customer. Since procurement outsourcing is going to become the rage, as per my “Why You Should Consider Procurement Outsourcing“, it’s important to understand what the role of metrics is in the sourcing, and outsourcing, process since you never know when your CEO is going to get the outsourcing bug.

The paper enforces that customers (should) tend to focus on metrics that easily convey to providers the dimensions of performance most important to them. However, although the summary notes that customers and providers tend to refine the set of metrics used to measure performance throughout the relationship, it fails to mention that providers tend to want those metrics that focus on the performance measures that make them look good. Although it does imply relatively early on that outsourcers may have their own choice of metrics early on, it doesn’t make it particularly clear. In particular, there are providers that will try to steer the customer toward transaction oriented and fixed cost reduction metrics that are easy to measure, manage, and achieve.

Even though the key to a great outsourcing relationship is for a provider to insure that metrics are aligned with those aspects of performance that matter most, not all outsourcing providers may recognize the fact, or even if they do, be able to recognize which aspects of performance matter most to a customer. The fact of the matter is that there is no magic set of metrics that fits every sourcing need – and different managers at different levels within the customer firm may want different metrics, especially if the customer does not have its house in order before jumping on the outsourcing bandwagon.

It’s important that the metrics chosen focus on the strategic goals of outsourcing the process, and not the transactional nature of the process being outsourced. Specifically, are costs being reduced, are they being reduced with approved, quality suppliers, and are they tracking well against market averages? Has overall spend throughput in the outsourced categories increased by an acceptable percentage? What percentage of spend is being captured in the system? Have project timelines decreased on average?

After all, if costs are being reduced, but are still more than market averages, then outsourcing is not working very well. If overall spend throughput through strategic sourcing projects has not increased, then outsourcing has not succeeded. If the provider is not capable of capturing 100% of sourced spend in their systems, then their technology is not up to snuff. If project timelines have not decreased, then the customer is better off doing everything in house.

Furthermore, the set of metrics chosen should be helpful in making the in-house vs. outsource decision, should be useful in selecting the right provider, should be capable of measuring the progress of the relationship, and should promote continuous improvement. In addition, when evaluating a potential provider, the customer should have a set of metrics that address total cost, service quality, HR policies, technological capability, financial stability, and other special interests of the customer, such as carbon neutrality goals.

Procurement outsourcing, like any type of outsourcing, is not an easy decision and should not be made quickly or lightly. Significant research should be done up front by both parties because the full value of a successful relationship will generally not be realized for three to five years, as there are a lot of up-front costs in making the transition and outsourcing adds head-count (as you need people on your team overseeing and managing the relationship). Even though outsourcing the right categories to the right provider can be a great success, outsourcing the wrong categories to the wrong provider can significantly increase costs. So do your research, and take some time to find the set of metrics that will work for you.

Buried in the mound of data presented by Mr. Jim Mikell in his presentation at the 5^th International Symposium on Supply Chain Management was some convincing evidence that, when done right, procurement outsourcing really does work. Depending on the situation, a company without a world class sourcing organization can outsource to a procurement outsourcer with a world class sourcing team and save up to 15-20% in a properly structured and scoped multi-year deal. Considering that over sixty percent of procurement spend is typically addressable by outsourcing, this provides a compelling reason to think about it – at least with respect to the spend that you don’t have a good grip on. Furthermore, the savings from procurement outsourcing can be nearly five times those derived from outsourcing other business processes like finance and accounting and human resources.

Where does the savings come from? Strategic sourcing (40% to 60%), compliance (25% to 50%), and operating efficiency (10% to 15%). A qualified procurement outsourcer will have skilled buyers with deep category expertise, systems to create orders and match invoices and make sure all spend is on contract at the contracted rates, and be able to leverage their scale to operate more efficiently.

When done right, procurement outsourcing can do more than just save your organization dollars. According to Jim, it can also:

• address the resource shortage issues in your sourcing group
• improve control, visibility, and compliance for a broader range of spend
• improve personal and professional experience for procurement professionals
• enable focus on higher-value, “strategic” procurement
• address the fact that industry category expertise is low for most buyers as the right procurement outsourcer will have experts on staff

Furthermore, the procurement outsourcing marketplace is maturing and, according to Jim and the Everest Research Institute, entering the “emerging rapid growth” phase of market maturity. This is evidenced by the fact that there were close to 20 major procurement outsourcing contracts signed last year, whereas there were only 39 from 2000 through 2005, with even more projected for this year.

Jim also presented a disciplined roadmap to address the challenges involved in outsourcing, which is defined as follows:

1. Define “savings”
   Challenges
   • defining savings for complex categories
   • unavoidable economic fluctuations
   • differing stakeholder expectations
2. Establish (Realistic) Savings Target
   Challenges
   • high number of vendor relationships
   • lack of spend visibility
   • moving saving targets
3. Measure Savings
   Challenges
   • savings attributable to supplier’s efforts
   • distinction between savings and avoidance
   • investments required to measure savings
4. Enforce Savings
   Challenges
   • fragmented & decentralized spend
   • areas of high maverick spend
   • budgetary issues
5. Manage Operational Costs
   Challenges
   • upfront investments in systems
   • higher ongoing staff

And remember it’s not “your mess for less”. If you don’t have a good grip on what you’re doing and what you need to get out of it, you can’t just throw it over the wall and expect a third party to be successful. You need good process and project management, and this might require making some up-front investment to clean your house up and get ready for the transition to someone who can take something that you’re doing well and make it something that, combined, you do great.

Accenture recently released the results of their recent study on procurement outsourcing on “how procurement masters leverage outsourcing on the path to high performance” which found that on 1B of controlled, normalized spend, procurement masters achieve 30% higher savings with costs that are 50% lower. Furthermore, the organizational challenges faced by procurement masters are often less constrictive or severe than those faced by midrange or low performers who often face functional silos, a scarcity of resources and / or talent, and a lack of authority, among other organizational barriers.

Accenture found that procurement masters approach the function more strategically and holistically and more, thus, more capable of effectively tapping the the depth and breadth of skills, capabilities, and expertise offered by a service provider. They also found that procurement masters engage their suppliers to a larger degree, frequently collaborating to create value versus blindly seeking the lowest price. Procurement masters are also technology leaders who utilize the outsourcing provider’s processing power to increase efficiency, make faster decisions, leverage and focus internal skills, and connect with suppliers and third parties. In short, they excel in procurement strategy, sourcing and category management, requisition to pay, supplier relationship management, workforce and organization, and technology and know how to seamlessly combine the various processes to achieve the maximum benefit.

Some of the more enlightening points made by the study are the following:

• Procurement masters, who approach the function more strategically, look and think three to five years out when planning purchases for critical categories.
• Procurement masters make widespread use of cross-functional sourcing teams for managing projects, formulating strategies, managing supplier selection, and implementing contracts.
• Procurement masters excel at providing clear and documented buying channels to the end user (83%), whereas low performers do not (8%), and carefully define and consolidate their category-specific processes through buying portals.
• Procurement masters often use outsourcing as a means of reengineering processes, ensuring that logistics, purchasing, and engineering all cooperate effectively.
• Procurement masters leverage a world class provider’s investments in category research, innovation generation, new technologies and improved approaches.
• Procurement masters take an intelligent and aggressive active approach to supplier relationship management.
• Procurement masters excel in active workforce management (78%) whereas low performers do not (3%). They objectively measure existing competencies, make frequent adjustments to organizational skills to insure continual alignment with procurement strategy, emphasize ongoing training and linkages to performance metrics, and blanket competency development strategies across the procurement user network.