The digitization of business led by disruptive SMAC (social, mobile, analytics and cloud) technologies are changing the fundamental foundation of how business is done. The fundamental strategies, processes, and financial structures need to change as organisations unbundle and decouple traditional value chains. The changing face of business has also impacted the Sourcing and Procurement (S&P) organisation.
Strategic alignment of S&P department is a high priority for CXOs
The spend on S&P versus the value it generates is under the scanner. The bottom-line impact on COGS (Cost of Goods Sold) can be significant as S&P may be supporting up to 60-70% of total company spending. There is also an urgent need to deploy strategies that protect the business from supply chain volatility risks especially in global environments.
Experienced S&P leaders today understand the need to build the strong collaboration with their clients and therefore introduce initiatives with the intent to transform the S&P organisation. Positioning S&P as a leader and strategic enabler to drive intelligence for taking important business decisions is the need of the hour. S&P leaders are today asking some very critical questions:
- Is my Source2Pay cycle well managed and aligned to meet customer needs?
- Do we have the trusted advisors, resources, and capabilities to provide a superior customer service and experience?
- Are we organized right in terms of our customers, categories, and geography?
- How do we increase the SUM (Spend Under Management) and savings – at Enterprise, Business Unit, Category, Vendor and Transaction levels?
- What strategies, processes and technologies should we adapt to become an efficient and world-class S&P organisation?
To address the above questions and to effectively support business needs, S&P departments are today:
- clearly segregating strategic and operational capacity and processes into client-facing, category-facing, and operational roles;
- becoming leaner, agile and responsive by building and retaining core competencies and key talent;
- consolidating capacity and overlapping capabilities that may be segregated across purchasing, sourcing, vendor management, BU vendor operations and any such geographical groups; and
- seeking procurement advisory and outsourcing services from third parties.
The choices: Improve operational efficiency, outsource or do both
Addressing high-volume client needs by adding resources is not going to be the most cost-effective and sustainable option for S&P. The choices can range from improving operational efficiency to outsourcing the non-critical operational processes or doing both (which is recommended).
Operational efficiencies can be improved by training talent, centralising, consolidating, optimising processes and eliminating demand and waste.
Industry research suggests that many S&P leaders today consider outsourcing as a viable option and it is gaining importance for companies of all sizes. Reports indicate that the global procurement market is expected to register a CAGR of 23.14% for 2012-2016 driven by cost reduction. Gartner predicted global procurement outsourcing market growth of 6.2% in 2013 with a five-year compound annual growth rate of 5.3% globally.
Core drivers for S&P outsourcing could be related to reducing the cost of operations, transforming S&P operations, improving operational maturity, improving competitiveness, focus on core capabilities, improving access to products and services, improving efficiency and compliance and improving supplier performance.
Several S&P leaders are successfully leveraging outsourcing to enhance value
It is advisable to start small and gradually increase the scope of services as confidence in supplier ability to deliver and its acceptance increases. In the beginning, repeatable and stable operations can be good candidates. High-value processes and sub-processes related to vendor governance, category strategy, spend analytics may not be the ideal candidates for outsourcing but can be matured internally or improved by leveraging external advisors.
Industry data shows that most S&P leaders who have outsourced operations have seen better value due to increased savings, improved SUM (spend under management), tangible UCR (unit cost reduction), better spend visibility and reporting, improved processes and better decisions on the overall spend portfolio. They have embraced outsourcing as an opportunity to benchmark capabilities against industry standards and improve processes while keeping the focus on improving customer experience.
Some best practices to get started with the S&P outsourcing journey
In the short term you can start tactically but take a long-term strategic view is important to derive the best value:
- Select the vendor keeping long-term relationship and needs in perspective.
- Establish a strong governance team and involve all stakeholders.
- Define your strategy and expected business outcomes.
- Ensure outsourcing will not disrupt any business needs.
- Implement strong change management to address concerns related to loss of jobs, changing roles and control.
- Invest in building supplier relationship and collaboration.
- Implement vendor performance metrics and dashboards to get better visibility.
- Collaborate with your partner to improve the value of engagement over time – this could mean automating several processes, eliminating demand, and deploying tools/technologies.
- While partnering with third parties for better savings and results; work with your clients and business to deploy mechanisms to enforce spending accountability.
Outsourcing can be a key enabler and transformational wild card for S&P departments to deliver more value to their business and can position them as more strategic to their clients. Outsourcing if positioned correctly will be able to provide the right mix of talent, flexibility, and scalability to address business needs.