Outsourcing is a topic guaranteed to raise the blood pressure in most organisations, as the true believers attempt to strip the business down to its irreducible core in opposition to the greybeards and nay-sayers who have seen it all end in tears before. But suggest to even the most fervent outsourcer of a procurement director: ‘You’ve put everything else out so why not outsource yourself?’ and a quick call to your (outsourced) security staff is advisable.
For some, of course, this is an issue of faith and no compromise is possible. But even where the protagonists are prepared to consider dispassionately the merits of an individual business case, too often progress founders on the issue of relationships. ‘How’, it is asked, ‘can I maintain a good working relationship between my supplier and my end users when I have no contractual relationship with the supplier? How can I get ever greater value from that supplier, who may not be core but is certainly critical?’. A recent round-table held by Xchanging Procurement Services, one of the leading pure play (ie not a consultancy) business process outsourcers (BPO), suggested some answers.
The usual image of outsourced procurement is one that consolidates orders to create purchasing power with which to beat up the supplier. There have been enough operations like that, and consequently enough well-publicised outsourcing failures, to warrant much of the caution and scepticism. David Rich-Jones, ceo of Xchanging, claims that there is another way – one that captures value for both supplier and client while achieving the business goals that are the client’s motive for outsourcing in the first place.
It’s a matter of relationships
The key, he claims, is to recognise that the BPO has to work at its own independent relationships with both supplier and client – merely acting as the client’s agent, (or as a wholesaler for the supplier), doesn’t work. Far from commoditising everything and focusing on short term prices, which might seem the most natural route given that many of the obvious candidates for procurement outsourcing are categories like printing, car hire, much of the T&E budget, the BPO can build the long term relationships that client and supplier would be most unlikely to create on their own.
Xchanging, for example, is now contracted by BAE Systems as the exclusive source over some 20 categories for ten years. The immediate result is that suppliers have security of tenure, without the cycle of continuous rebidding that is notoriously bad for relationships (not to mention expensive). Such timescales make it possible, indeed imperative, to invest in improving the procurement processes, attacking both hard and soft costs. Rich-Jones says ‘If the parties are there for the long haul we have to fix the processes to take cost out of the whole supply chain, help suppliers improve and challenge inefficiencies. It is as incumbent on us to provide innovation such as online tools to the supplier as on them to offer innovation to us.’
In effect, a casual transactional relationship between client and supplier is replaced by two relationships, client/BPO and BPO/supplier, both of which can be managed strategically.
If that sounds easy, it isn’t. A lot depends on the client and the BPO must be prepared to turn down inappropriate business or clients with the wrong attitude. Says Rich-Jones: ‘We have to invest to get customers to articulate what they want from a category of spend. Often they don’t know.’ The client must be prepared to concede exclusivity of supply and complete operational control. Maverick spending plays havoc with this business model. This requires board level commitment in the customer and considerable stakeholder management skills by the BPO, not to mention patience and investment. With BAE Systems, it took six months, £375,000 and 10 signatures to set up the baselines for a single category.
The right approach
The approach will not work with all suppliers. Rich-Jones says, ‘Our relationship with the supplier has to be strategic – even if it wasn’t for the customer – if the business model is going to work. Of course you can’t build a strategic relationship overnight. Time is the proof but not all providers have the mind-set to become strategic partners, even after three or four years.’
Outsourced procurement has had a number of false starts over the years, principally because of a focus on using aggregated buying power to reduce price and on dumbing down supplier relationships to the merely transactional. But worldwide (albeit largely in the US) IDC reckons the value of outsourced procurement in 2002 at £5.9bn, rising to £12bn by 2007.
Outsourced procurement should no longer be seen as an ‘all or nothing’ issue worthy of fisticuffs by the water cooler but as an additional tool in the procurement armoury, especially worth considering for situations and categories where centralised, price/volume driven purchasing can’t provide levels of service and value improvement, or where local or devolved purchasing lacks internal resources and/or buying power.
Briefing points
- Though it has a poor reputation, outsourced procurement is a valid model for some categories and companies
- Recognise the difference between an outsourcer who aggregates demand to hit the short-term market (which may be appropriate in some cases) and an outsourcer who is treating his suppliers as strategic partners for longer term added value
- With the latter, clients need to be clear about their requirements and expectations. This may take time and money
- The client must be prepared to grant exclusivity, operational control, and a long term relationship
- Top level commitment is required to ensure compliance
