Jeremy Ferrer
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Optimize your C-Class purchases and boost your results.
January
To create value by outsourcing their purchases, businesses need to carefully consider long term benefits the use of external service providers.
The rise in power of business process outsourcing (BPO) has transformed the structure of many sectors over the past two decades.
Businesses now regularly outsource activities, processes, or entire operations to third parties. In turn, the BPO sector has evolved to offer an increasingly broad range of services, including many services of strategic importance such as manufacturing or research and development.
When it comes to shopping, the outsourcing process followed the same trajectory, but more slowly. Outsourcing purchases, on transactional aspects, such as order processing or invoice management, is now relatively common.
However, it is only in the last ten years that the outsourcing of activities ofsupplying strategic, such as the selection of suppliers, the negotiation of contracts or the management of specifications, has become widespread.
Procurement outsourcing providers say that outsourcing these activities offers their customers numerous advantages.
By grouping together the purchase requests of several customers, they aim in particular to guarantee Lowest prices. In addition, procurement outsourcing providers implement “industrial” processing procedures to reduce costs related to Sourcing, the evaluation of suppliers or the processing of requests for quotations. They also have strong expertise in categories where low expenses prevent customers from maintaining appropriate procurement expertise in-house. Finally, the outsourcing of Class C purchases, smaller or less important to a third party, leaves more time for the internal buyer to optimize strategic purchases.
Some companies have succeeded in outsourcing some or all of their activities fromstrategic procurement. For example, a European public service has subcontracted its entire purchasing function to an external service provider under a five-year contract.
The Purchasing outsourcing provider was able to apply commercial levers proven in its procurement activities — volume consolidation, introduction of new suppliers, and renegotiation with existing suppliers — and it was also in a position to use treatment operations at low cost to save money on transaction activities.
These changes allowed the client company to reduce its overall operating costs by 19% and to improve its customer service.
To successfully outsource procurement, businesses need to adopt a highly systematic approach that includes three fundamental steps:
1 They outsource strategic purchases only in categories where this creates value. Value in an obvious way.
2 They have a accurate understanding of sources of this value and of how to release them.
3 They choose Purchasing outsourcing partners who have the capacity to address these value sources and then define and implement agreements that optimize the chances of achieving substantial savings.
Deciding to outsource procurement in a particular category requires the same thought and analysis as any other purchasing decision. The right decision is based on two factors.
What is the strategic importance of the category to be outsourced?
Some procurement categories can be a distinct competitive advantage for the business or have such a significant impact on quality requirements or customer value proposition that outsourcing them would create unacceptable risks for the company.
Can the company effectively manage this purchasing category internally?
A company's ability to get the most out of a category depends on many factors. These factors may be the size and complexity of the supplier market, the relative influence of the organization in that market, the existence of appropriate internal expertise, or the availability of available resources.
In the case of non-critical procurement categories, businesses need to consider whether another organization might be better placed to manage this category than they are.
In general, outsourcing is therefore a more attractive option for class C procurement categories In which businesses spend less or buy less frequently, or when they lack the skills or resources to do a good job internally, procurement outsourcing can create value.
When undertaking this analysis, businesses should consider the medium- and long-term implications of their decisions, as well as their short-term effects.
For example, a global food processing company deliberately kept the management of a number of non-essential categories in-house. She used these categories to develop the skills of young Buyers in the purchasing function, thus helping to ensure succession within the organization.
Once an organization has established a shortlist of eligible procurement categories, it must decide whether or not it should outsource these purchases and thus create value.
To do so, she needs to understand exactly how procurement outsourcing can create value in the category and then choose the right outsourcing provider and compensation format.
Les levers to create value by outsourcing procurement fall into four main categories:
Volume aggregation:
By grouping the requests of multiple customers, procurement outsourcing providers can often negotiating better prices, especially in areas where the company's own expenses are too low or infrequent. To take advantage of the benefits of volume aggregation, however, providers must ensure that delivery requirements are sufficiently consistent across all their customers. It is also worth checking whether volume discounts still make sense. We saw cases where smaller suppliers offered better prices than much larger suppliers.
Competence:
Their size allows procurement outsourcing providers to offer in-depth expertise and real-time market knowledge across a wide range of procurement categories.
Access to this cutting-edge expertise not only provides customers with direct benefits, it can also help them “learn from the best” and improve their own abilities to Sourcing.
Labor cost arbitration:
Procurement outsourcing providers have implemented standardized processes, often located in countries with low labor costs. This competitive advantage quickly reaches its limits in many strategic activities that require close cooperation and often physical proximity with customer services: negotiations on technical specifications, contractual clauses or the management of complex supplies...
(Re) definition of needs:
In the most successful procurement organizations, 40 to 50% total savings are the result of internal changes, such as optimizing specifications to minimize total cost of ownership or to control demand. These economies also tend to be the most sustainable in the long term. To take advantage of the benefits of the functional review of purchase requests, close and ongoing collaboration between the procurement function and other departments of the company can however be more difficult for an outsourced provider.
The potential power of these various levers varies between organizations and purchasing categories. It also varies over time. Commercial levers, such as volume aggregation, often allow rapid savings to be made while it may take longer to question specifications.
Once they know that outsourcing procurement can create value, businesses need to take the appropriate measures to achieve it. Ultimately, the success of any procurement outsourcing agreement is determined by the preparation and implementation of the framework agreement. It then depends on the selection of an appropriate provider, the establishment of solid relationships between the provider and the organization at large, as well as careful management of the process once established.
To select the right partner, businesses need to thoroughly assess the market, including the provider's experience, expertise, scale, and existing relationships with customers. Different players in the procurement outsourcing industry have very different value proposals. Businesses need to ensure that the geographic reach and culture of the provider match their needs. For example, when a global mining company entered into a procurement outsourcing contract, its internal procurement department was forced to provide significant support, as the contractor's employees were perceived within the company as inflexible and difficult to manage.
To establish an effective relationship between the provider and the organization as a whole, the company must ensure that the proposed agreement meets internal requirements. Resistance from management or operational staff can cause a procurement outsourcing agreement to fail from the start. Les business stakeholders need to be convinced of the value created by outsourcing procurement.
Most businesses believe that appointing a project manager is essential to monitor contractor performance and resolve relationship issues.
Businesses should also be careful to treat their service provider as a strategic partner — by clearly communicating their strategic orientation and by giving the provider sufficient control over the categories assigned.
Performance indicators are essential to maintain the interests of the service provider and the actors in the company. Strong agreements focus on indicators that generate long-term savings, such as goals for continuous improvement. Objectives should be clear Defined and measurable, and all parties to the agreement should understand the goals and expectations, as well as how to calculate them.
Of performance indicators Misaligned can lead to broken relationships:
by encouraging the provider to focus on quick wins or on the cheapest suppliers, quality, service, and total cost of ownership can be compromised.
Finally, businesses should prepare well for the transition and implementation phases of the agreement. They need to support implementation with a solid internal team that can assist users throughout the transition, solve problems as soon as they appear and guide the process of improving the relationship.
The various players in the procurement outsourcing sector have different skills and proposals for their customers. When selecting a partner, businesses need to know if the capabilities and geographic scope they offer are appropriate to capture the value they need. Market players today fall into three main groups:
1 Business Process Outsourcing (BPO) Generalists
They are major global players that provide end-to-end services for procurement and other functions. Their main value proposals are volume aggregation and price negotiation. They can generally address a wider range of categories, but often offer standardized solutions. In fact, many generalist BPO providers see procurement as an entry ticket for additional outsourcing and IT outsourcing activities.
2 Procurement specialists
They are smaller players with regional expertise or by purchasing category. They provide end-to-end services and generally work closely with stakeholders. Their main source of value is in-depth expertise to challenge needs and specifications and then select suppliers. However, they generally lack a global presence and have a lower ability to accumulate expenses.
3 Offshore service providers
These are large suppliers that offer cost savings through the use of labor in low-cost countries, mainly for transaction support and sourcing activities. As a result, their ability to exploit all available value indicators is often limited.
Outsourcing procurement activities can give businesses access to savings, expertise, and capabilities that they don't have in-house.
But it also comes with significant risks. For these agreements to work, businesses need to ensure that the benefits offered by BPO providers are clear and that the scope and indicator structure of the agreement are designed to create long-term value.
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