Today's guest blog on procurement outsourcing comes from Bill Huber, Director, TPI.
Procurement
outsourcing is positioned to drive some of the most dramatic bottom-line
benefits to corporations. Yet of all forms of sourcing, it is broadly
misunderstood by both procurement and outsourcing practitioners and has
achieved a slow rate of adoption.
Recent research by the Aberdeen Group (sponsored by TPI), Procurement Outsourcing: A Strategic Imperative, showed the top four reasons for not outsourcing procurement:
- Procurement a core competency: 44 percent
- Prior investment in procurement applications: 43 percent
- Unclear benefits/value of outsourcing: 38 percent
- Perceived loss of control: 29 percent
As a former Chief Procurement Officer (CPO) for a very large company, these four reasons have aligned with my thinking at various times in my career.
Originally, I was committed to the following premise: a company's ability to transact efficiently and effectively is absolutely a core competency which differentiates the agile from the maladaptive. So, if my company were to outsource procurement, wouldn't we be giving up this competency? Who will source the sourcer?
After continuing to sty the trend and speaking with very intelligent peers at other companies, I came to three realizations.
The first: Developing strategic relationships, determining contract and decision-making standards, and establishing a risk management and governance framework are all strategic activities. Managing transaction processing is not. The sourcing of desktop computers, office supplies or airport transportation is commodity focused and stimulates operational efficiency and cost-savings only. The bottom line: Best practice procurement is about understanding strategy and acting accordingly.
The second: With prior investment in procurement applications, it is normal to migrate application investments to a third-party outsourcing provider. It is a matter of a business case. But procurement managers tend to be very conservative regarding spending and maximizing investment value. An occasional write-off and migration to a model with a better business case is without a doubt the role of a good manager.
The third: Unclear benefits and loss of control are a function of education and analysis. A well-structured outsourcing transaction will always have a clear business case and structure. The issue is that companies do not have sufficient resources to focus on sourcing strategy and execution, risking the loss of control throughout the life of an engagement.
Many outsourcing experts do not understand procurement and see its efficiency play around transaction costs, similar to finance and accounting. At most companies the potential cost savings from a pure transaction efficiency perspective is comparatively unexciting. This is why procurement outsourcing needs to be considered holistically.
The benefits of procurement outsourcing come through long-term business relationships, not via transactional burdens associated with a purchase. What drives millions to the bottom line is mature transaction efficiency, market
