Procurement outsourcing offers a unique business value proposition compared to traditional BPO models such as HR, Contact Center and F&A. While these traditional models are easier to understand because they are primarily based on labor cost and process cost efficiencies, procurement savings are more driven by spend savings. The procurement outsourcing value proposition can be very large because it is related to the size of a company’s spend and how much this spend can be reduced. For example, a five percent reduction on $2 billion of spend is a $100 million savings. The size of potential impact is why procurement BPO is gaining attention.
Procurement’s unique value proposition is conceptually easy to understand and describe but complex to contractually document, measure and connect to a company’s bottom line. This in turn makes it complex to evaluate during an outsourcing selection process and in ongoing governance. The challenge is in defining what it is you want against what it is you can measure and hold your supplier to.
Procurement outsourcing can create value in areas such as improving spend under management, reducing commodity costs, improving sourcing events, consolidating vendors, improving vendor quality and service and compliance. These activities take a relatively small amount of labor, but can affect a large amount of spend. Procurement outsourcing vendors can describe the impact of each of these areas, for example by enabling a 20 percent reduction in cost of commodity X, or improving spend under management by N percent. This value is a result of improved “factory” processes, technology and procurement talent that the supplier can provide, which are translated into cost savings.
There are three primary challenges to “guaranteeing” these Procurement BPO improvements will be attained:
- Many companies lack a solid detailed baseline that can be tracked against
- Company personnel are still involved in the outsourced process, and thus impact adoption and approvals
- Lack of agreement on how to measure savings
Because of these challenges, creating scorecards that tie to contracts and expectations can be complex. A company has to assess up front how it wants to evaluate and govern a supplier to deliver long-term value. Having a solid baseline at the start enables a better analytic scorecard to be leveraged and for specific targets and measures be developed. Creating the baselines and scorecard takes time and resources to create if models are not already available. If a robust baseline is not available to track specific targets, then more weight will need to be put on evaluating the cultural fit and understanding how the supplier will support you, such as the resources it will commit to quality programs. You can be successful without having the baseline and solid measures, but this approach creates a more challenging business case for Procurement BPO because the full potential value may not be locked in or committed.
To be continued: Find out how accurate scorecards can help boost savings realization and contract governance in the following part of this series.