The National Audit Office has suggested that the NHS in the UK could save in excess of £500m through more effective procurement.
This raises a very interesting question – if the NHS can do this, what can UK plc do as a whole?
There is so much duplication and ineffective processes across procurement that I estimate that the total figure could be many multiples of this. There is talk today of small schools synthesising – i.e. working together and sharing services. As far as I’m concerned this is a no brainer and should be considered a given rather than an option.
Let’s concentrate on the front line services, let’s concentrate on our core competence, let’s concentrate on freeing up adminstrative duties to concentrate on client/ customer delivery. If we can collectively develop this philosophy and actively look for efficiency opprtunities rather than being protective of position/ role, then this country will quickly get back on its feet.
The way to drive real savings across procurement is not to hit the suppliers on the head for a couple of percent off this and a few pounds off that, it’s about looking strategically at how best to structure the whole process.
Where things need to be centralised, centralise them. Where there is a need for local decisions, then retain the responsibility local. However, let’s not fudge it.
Take the hard decisions now and we can look forward to building a better future for all.
Tony Lockwood, Chief Executive, xynergie
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.
Not my words – this is the description given by none other than Francis Maude, the Paymaster General – see this article in the Telegraph
This ties in with the Green Report that highlighted the inefficiencies across Government.
Although it is pleasing to see that Government has last started to realise that there is an alternative to front line cuts, I do question how they will bring real innovation from the private sector and indeed from the SME’s within the private sector to make real change.
The big opportunity for the Government and the country as a whole is to accept that change is required (i think that we are getting there on this point), understand that there are alternative approaches available other than from the big 4/5 ‘consultancies/ outsourcing’ firms (that have been getting fat on the profits that they taken from the public purse over the last few years) and engage with the smaller, more nimble new entrants to the market that bring in all of the innovation.
Only time will tell whether this opportunity is taken or wasted!
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.
Can Procurement continue to operate as it has for many years?
Can Procurement professionals continue to simply manage categories and focus all their attention on getting better deals from their supply chain?
I believe that the answer to these two questions is the same – absolutely not!
As the global economy sways in the wind almost daily at the moment, Procurement professionals have the opportunity to jump up, grab hold of the opportunity and drive change in the way that organisations think about and manage the supply chain.
Collaboration is the future and Procurement can and indeed should look to drive a collaborative spirit into the heart of every organisation (both private and public). Having worked with many organisations, I’m still surprised that;
- organisations still operate in silos – this is at the root of some of the issues in the UK public sector where departments do not collaborate at all
- category management is at the very core of procurement functions but this tends to focus on driving better deals with suppliers rather than looking at improving the end to end planning process
In future, we need to ensure that a collaborative spirit is applied across the whole organisation.
Collaboration is required throughout the supply chain process, from planning to ultimate delivery. It’s only when we get all of the key people (both internal and external) around the table to discuss openly the challenges faced by the organisation will sustainable solutions be found. Operating is a position of openness and true partnership is the way to go. Embrace every part of the supply chain to take maximum advantage of their expertise and knowledge.
Procurement functions are in an ideal position to take advantage of this opportunity – to become the conductor, the facilitator, the devils advocate.
Yes Procurement has a future, but not as we know it presently!
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