Procurement outsourcing is a hot issue with large businesses in the current financial environment. Procurement outsourcing is the transfer of the procurement or purchasing department to another specialized company. This allows the company to benefit from the expertise of the outsource company. This also has cost benefits for the sourcing company.
Procurement and outsourcing enables a company to concentrate on its core competencies without the need to staff and manage an internal purchasing department, with all the costs that involves.
Many large companies have long outsourced its indirect purchases, which are those that allow it to manage its day-to-day activities. This would include such activities as recruitment, marketing, facilities management and office services such as cleaning.
Whilst it seems almost natural for indirect purchasing such as hiring staff or purchasing advertising space, companies are now looking at the cost savings that can be found from the procurement outsourcing of the direct purchasing activities.
Direct purchasing are goods that are purchased either to be sold on to the consumer or as part of a production or manufacturing process. Therefore, if you are a wholesaler, the purchase of your initial products would be a direct purchase and if you are a toy manufacturer then the plastics you purchase are also direct purchases.
In the United Kingdom, the government has gone one-step further and created PFI projects (Public Finance Initiatives) where large companies bid to run public buildings such as hospitals. The winning business provides and manages all the facilities, cleaning and day to day running of the hospital for the next 30 years.
Business travel has always been a popular service to outsource. Many companies allow a separate company to purchase all their travel, flights and hotels. The business benefits from cost savings as well as not having the bother of managing so many small ad hoc purchases.
The public sector has always outsourced their purchasing to various degrees. Much of the procurement is put out to tender and competition to win the contracts is fierce. This is because public sector work is regular holds some cachet and is reasonably well paid.
With the rise of the Chinese, Indian and Taiwan manufacturing capabilities outsourcing of manufacturing has become very popular. Indeed most computers and many electrical goods are now manufactured in the Far East. This means that all of the company’s manufacturing purchasing is also completely outsourced. Not only does the company benefit from very low manufacturing costs, but they also benefit by not having to purchase all the component parts.
You can clearly see that procurement outsourcing is now a key part of many large company’s business strategies and that they are clearly benefiting from this decision.
To learn more about outsourcing procurement, procurement management & strategies etc visit the Purchasing & Procurement Center Website, the leading website providing Procurement Management & Strategies information & resources. The Center provides many free resources (Reports, Webinars, etc) for purchasing & procurement professionals – among them the most downloaded Purchasing Report over the web, “7 Star Purchasing Report”, which you can get at the website.
As 2011 is fast approaching, thoughts are probably turning to how you are going to achieve your numbers in the year ahead. There is undoubtedly uncertainty in the markets at the moment and the economists seem to be divided as to what the year ahead will look like.
However, your success in 2011 will be more determined by your actions than any external factors. If you look back over previous recessions/ downturns, there are always those organisations that come out of them stronger and more profitable. Equally, there are individuals that thrive when the going get tough and those that just give in!
So, the question is – “which are you going to be in 2011?”
To start as you mean to go on, this time of the year is always good to reflect and trim any fat that exists within your business. Take a look at the following five suggestions and see how these can apply to your organisation. Please feel free to add other ideas within the comments.
1. What activities are you undertaking that is adding no value to your end customer? Once you have identified these, review how you could undertake them differently, more efficiently, or more radically, determine whether you have to do them at all or can you outsource them to a third party who can provide greater leverage?
2. What is your core competence and what non core activities are you doing that can be outsourced? Again, by creating focus on your business function or ideally across the organisation, identify those activities that you must do to support your core competence. At the same time, this will help you identify those activities that are non core. Look creatively at how you can more effectively deliver these non-core activities.
3. Ask yourself the theoretical question – “if I had to deliver the same results with 80% of the resources that I presently have, how would I do it?” – putting this question another way, all organisations have people within the organisation that deliver little or no value. Make it your business to strip the lowest 20% from your organisation each and every year. You’ll be amazed at the impact that this simple challenge creates.
4. In any process, there will be many hand-offs between people within your organisation. Take each in turn and challenge yourself to reduce these hand-offs by 50% – by empowering individuals within your organisation to take action at the front end, you’ll radically reduce the workflow across any process and the efficiency gains will be significant
5. How is your sales and marketing function performing? Research indicates that it now takes a minimum of seven contacts before a prospect raises his/her hands to enquire about your product/ service. What does this mean to you? Well, assuming that you have your targeting correct, how many times are your marketing people or sales representatives giving up after just four or five contact points? By implementing a structured approach to lead generation taking into account the requirement for 7 contacts, you’ll quickly drive new business generation.
Take the opportunity between Christmas and New Year to reflect on how you can apply these five simple steps to ensuring that 2011 delivers your ‘best year yet!’
The long awaited spending review is almost upon us and everyone is holding their breath!
Surely, the review will create as many opportunities as threats – it really is a matter of perspective!
Tony Lockwood, CEO of xynergie states: “The knock-on for the private sector from the impending public sector cuts means that there has never been a time when private sector collaboration has been more vital. We in the private sector must pull together to weather the storm. When faced by external pressures, we are all in the same boat. We must cluster together and do what we are good at – innovate, change shape where necessary and boost efficiencies to avoid cuts of our own.
Procurement is a last bastion of hope for many companies seeking to survive uncertain seas. Outsourcing provides an answer for swift, decisive change that will ensure survival. Public & Private sector collaboration – now there’s a thought!”
In the Gartner report Business Process Outsourcing Vendor Consolidations: Is Your Contractor at Risk? it suggests that buyers should beware of the “nuances” of the following factors on the stability of BPO providers: the economic crisis, unprofitable contracts, loss of “marquee” deals, overexposure to the banking sector, capitalisation for deal pursuit, and levels of BPO contract cancellation.
So what do Procurement Heads need to be aware of to avoid such an issue?
Some BPO providers are carrying unprofitable contract portfolios, largely stemming from “too-much, too-soon” pursuit of deals, without much thought as to how to transition them to a standardised, rationalised, profitable state of ongoing operations.
Procurement Heads should gain insight into prospective providers’ deals to understand how profitable the vendor is. Most vendors will be reluctant to share this information, some will not, as there is a growing awareness of mutual dependency that characterises BPO.
BPO is a partnership and trust is the key to success. Being open about the profitability of their BPO business with you, as a client, can engender a mutual understanding of what it will take to be successful in the deal, and in the longer term, this can limit the risk to both parties.
Too much or too little new business?
It is equally important to gain insight into the service provider’s track record of winning new business, particularly over a sustained period of two to three years – paying particular attention to recent contract wins. Handling multiple deals at once is a necessity in outsourcing, and buyers need to know that a vendor can successfully cater to their needs, rather than struggling to deal with a backlog of business.
Although market share in terms of revenue may look impressive, it can be misleading. If they’re essentially running a closed book of business, it is possible that revenue may be shopped around to be sold off to competitors, or new market entrants.
Procurement Heads should also validate whether the vendor is able to exploit new trends, and new ways of conceiving, delivering and managing BPO services.
Influenced by logo clients?
The anchor client is likely to receive platinum-level attention from the vendor due to the strategic ‘do-or-die’ value of the revenue they represent so beware of being a small fish in a big pond. The loss or prospective loss of a logo client is also an important indicator, so Gartner recommends “prudent due diligence”. Ask the logo client for a reference: find out about their experiences with the vendor and assess how committed they are to the vendor.
Understand the cash position that your BPO brings to the table. Some vendors that are heavily leveraged or have become cash-conservative during the recession, may lack the funds to invest in significant front-end transition activities, or bid for the sort of business deals required to maintain the critical mass that is essential for the future success of the business.
Failure to win big deals can also be a bad sign. A vendor’s bid and proposal costs often run in to millions of pounds before the deal is even won, and if a provider has spent “significant cash and months” in deal pursuit, the loss of a large deal to a competitor can be “devastating”.
Dependence on financial sector?
BPO providers that are wedded to the banking and finance sector may face a particularly uncertain future. Exposure to the banking sector is by no means an absolute harbinger of doom, but as the financial services sector accounts for around one-third of the total BPO market globally, some sourcing executives will need to be wary.
Financial services pure-plays and BPOs that generate more than 85 per cent of their revenue via financial services will be most vulnerable, according to Gartner. Providers with significant amounts of BPO revenue from the banking sector were the first exposed to the credit crunch, then the meltdown in the financial services sector, and wider global recession where they could be the most exposed.
Contingencies for contract termination?
Over the past two years Gartner has seen the rates for contract cancellation and in-sourcing rise sharply, and there is no reason to suppose that this trend will be reversed. So it is increasingly important for BPO sourcing managers and their legal advisors to build exit strategies into contracts, and develop contingencies for contract termination, before signing any future deals.
Include clauses in the contract covering change in ownership, and using language to the effect of “in the event of a change in ownership, we can terminate the contract if we so choose” (with proper consideration given to the acquiring vendor’s “forward pathway”), and taking the management of the relationship with the BPO beyond tactical operational issues.
Set aside time through a formal communications schedule for both parties to assess the strategic health of the relationship, because relationship management can help to reduce the likelihood of contact cancellation.
The cost of changing suppliers can be steep, and nobody wants to switch service providers unless it is absolutely unavoidable or significantly beneficial. But change is an inevitable part of the business cycle, the evolution of the BPO industry seems unavoidable, and some organisations will be unable to avoid switching providers or in-sourcing their business processes at some point over the next couple of years. So now might be a good time to take steps to minimise the pain.