Key decisions for procurement professionals: How to balance internal and external service provision

services for professional procurementwww.achilles.com

key decisions for procurement professionals

How to balance internal and external service provisionPeter SmithManaging Editor Spend Matters UK/Europe

February 2012

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Executive summary

A Spend Matters White Paper sponsored by Achilles

Balancing internal and external service provision – key decisions for procurement professionals

Spend Matters observes trends in procurement carefully, and there is no doubt that the pace of change facing senior management is increasing given globalisation, supply chain risks and challenges, and the pressures on organisations to perform. This paper contains important messages, bringing together our thinking in two key areas with important implications for senior procurement practitioners.1. One of THE most important roles for

Procurement Leaders (CPOs and similar) today is to optimise the use of resources from both inside and outside the organisation, blending them successfully to achieve their goals.

2. Supplier Information Management is a powerful example of a capability that can be provided effectively from outside the organisation, yet contribute greatly to successful delivery of procurement objectives for the in-house team.

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In the first section of the paper, we explain:

� How and why procurement executives need to become adept at using third parties to deliver some of the tasks necessary for the function’s success.

� The various reasons and justifications for using third parties, such as economies of scale, expertise and leverage.

� How CPOs can evaluate and prioritise the use of third parties for procurement services provision to steer them towards the right ‘blended’ solution.

While large-scale end-to-end outsourcing of procurement has not spread in the way many analysts predicted ten years ago, there are, nevertheless, many opportunities for organisations to engage third party providers to supply elements of the overall procurement process – it doesn’t have to be all or nothing. There has been a visible growth in the number of organisations using external providers for certain spend categories; or elements of their more transactional P2P processing work; or indeed valuable specialist elements of the overall process such as Supplier Information Management, which is discussed here later. The opportunity to integrate internal and external service provision is considerable and is likely to lead to significant benefits compared to a service delivered purely with internal resources.

In our second section, we look in more detail at Supplier Information Management (SIM), an umbrella term embracing the collection, evaluation and monitoring of all information on suppliers and contractors including risk evaluation, vendor appraisal and performance management.

We explain;

� Why SIM is increasingly important to organisations, given the need to manage suppliers more professionally and mitigate the ever-increasing volume and scale of risks in global supply chains;

� The role of SIM in both the transactional and strategic sourcing cycles; and

� Why SIM is often a strong and positive

‘candidate’ for external service provision, with significant benefits available to organisations who follow this route.

Part 1 Balancing internal and external procurement delivery 1. IntroductionIf we go back 30 years or so, to the beginning of the author’s business career, virtually everything that was done by a procurement function or department was carried out by the internal staff employed by the organisation. There was little in the way of computerisation; management consultants were still a fairly exotic breed; and while there were other professional service providers in certain business areas already well established (such as consumer market research firms), there was little of that nature in the procurement space.

But gradually this has changed. There are now a wide range of providers all positioned to assist the procurement executive achieve his or her aims. However, in recent years, some commentators have suffered from over-excitement about trends, and proclaimed that full procurement outsourcing was ‘about to take off’. The reasons given by analysts for this statement have always seemed convincing; economies of scale, allowing organisations to focus on core business, and others. But stubbornly, year after year, the procurement ‘business process outsourcing’ (BPO) market grows very slowly. As AT Kearney said in their ‘Procurement Outsourcing1’ note, “Despite a substantial growth in outsourcing in the past several years, procurement outsourcing is less than two percent of all outsourcing activities”.

That’s not to say that firms ranging from Infosys to Xchanging, IBM to ICG Commerce haven’t made some progress and picked up some good clients along the way. But the market certainly hasn’t developed in the way that, for instance, IT or Payroll services outsourcing have done.

However, it is our hypothesis that procurement has actually taken a more subtle route to greater utilisation of third party service providers to support its own activities. Leading procurement practitioners are taking much more advantage

How to balance internal and external service provision – key decisions for procurement professionals

A Spend Matters White Paper sponsored by Achilles

1. http://www.atkearney.com//index.php/Publications/procurement-outsourcing.html

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of external service provision than a decade ago; but it has not been the full outsource route that has generally been chosen. Rather, they have looked carefully at which elements of the overall procurement process and set of responsibilities make most sense to acquire externally, rather than deliver internally.

One reason for this may be the understandable reluctance of procurement professionals to hand over their entire commercial sovereignty to an external provider, with the perceived danger of losing control of strategic supplier relationships. However, they see no such threat in buying external information or tools to support elements of their overall activity and process, where external provision can add value without major risk.

2. Why use third parties?Let’s go back a step and look at why organisations might use an external service provider for some of their procurement activity, rather than delivering it internally. These are the key drivers that tend to be used in justifications and business cases for taking that step.

Leverage volume / collaborate Approaching the market with a greater volume of spend will, all other things being equal, enable better value to be obtained. So transferring responsibility for the actual procurement of certain spend categories to a provider who can aggregate volume from a number of clients – and perhaps include their own internal spend in the total – may enable all those customers to benefit from better results than they could obtain as individuals. But this driver is not merely about leveraging spending for lower prices. As well as outsourcing actual direct ‘buying’, there are other activities, as we will see later, that it may be uneconomic for an organisation to perform individually, but become affordable when executed in collaboration with others.

Leverage expertise, address shortage of internal skillsOrganisations may suffer from a lack of particular expertise in certain areas, whether that means specific spend categories or other areas; perhaps technical skills relating to technology, or skills in finance, and market analysis etc. It may be that the issue is driven by local skill shortages; or more often it is not economic for an organisation to pay what is needed to get true experts in all the internal roles.

Reduce internal costs (labour arbitrage) If this last example is about getting more capability for the same price, in this case we are looking at finding cheaper resource to deliver perhaps a similar level of performance. Offshoring to lower-cost countries is the classic example here; originally we saw this in what were perceived as activities of a lower added value nature, such as P2P processing, catalogue management. But increasingly this may include more skilled work including sourcing or technology development.

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Sort out broken processesPerhaps a less common driver for outsourcing is as a response to ‘broken processes’ internally. While most experts will advise organisations to fix processes before outsourcing, and this is good theoretical advice, in some cases the organisation may simply not have the time, ability or resource to do this. In such cases, the outsourcing may enable benefits to be gained through the provider’s ability to do the work better and pass on some of the benefits. The bottom line, according to Horses for Sources2, is that organisations, tend to outsource processes that probably aren’t very well run in the first place.

Focus on core business Organisations may decide that certain activities are distractions to their ‘core business’. While this is often linked to the lack of skills described above, it may be independent to that and be a judgement that passing responsibility to an external body will free up management time and focus to concentrate on whatever is defined as “core”.

3. The growth of procurement service providersThe typical procurement function in a large organisation will almost certainly have many more activities performed by third parties than there were ten years ago. There will be technology platforms in use, probably with external support or consulting around their use and every chance there will be some consultancy involvement somewhere around the function; research, benchmarking, networking or information service providers will feature.

There are now many options and opportunities within the overall procurement process to consider third-party delivery of services that contribute to overall procurement effectiveness. At one extreme there is full BPO type outsourcing; perhaps moving all P2P activities to an external provider;

or outsourcing all indirect spend categories. But at the less dramatic end of the range, we can consider external provision of much smaller elements of the overall procurement task.

This is not generally termed “outsourcing”, although it shares some of the same characteristics. And it is not about transferring core responsibility out of the organisation; it is about gaining additional expertise and resource from outside to support the key functional activities.

The type of activities and responsibilities that organisations might look to obtain from external providers are described in the next section. But their range, importance and the opportunity they provide for improving procurement performance is very significant; a fact that many organisations and leaders have not, in our opinion, fully appreciated. As a consequence, we’ve come to this view.

One of the most important roles for Procurement Leaders (CPOs and similar) today is to source, manage, combine and blend capabilities and resources successfully, from inside and outside the organisation, to achieve their goals.

4. Prioritising the options for third-party provisionSo if this is a key role, how should a procurement executive determine what can most productively be delivered by third parties? We recommend a structured analysis of the range of options available across the whole procurement landscape; but in our experience, very few organisations carry out this sort of consideration. Decisions are made on an ad hoc basis, or those driven by a crisis or perceived crisis in a particular area. It is clearly better not to wait until events dictate hasty action, so we recommend strongly a pro-active approach to evaluating the options and structuring the best mix of provision.

How to balance internal and external service provision – key decisions for procurement professionals

A Spend Matters White Paper sponsored by Achilles

2. Horses for Sources. The undisputed facts about outsourcing. May 2011

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Stage 1

The first step is to identify work currently undertaken and develop a map of the processes and activities undertaken by the procurement (and related) functions. This does not need to be broken down into every detailed step, but should be considered at a level that relates to how the market might offer to provide such services.

For example, consider the P2P (purchase to pay) process. As well as the option to use a fully outsourced end-to-end service, there are options at every stage in terms of either carrying out the activity internally or sourcing from external providers.

� Supplier registration / enablement

� Supplier information, verification and master data management

� Developing and maintaining supplier and / or internal catalogues

� Processing requisitions and purchase orders

� Invoice handling and management of payables

� Spend reporting and analytics

Within the strategic sourcing cycle, we have the obvious option of outsourcing the entire responsibility for some or all categories. But there are also many potential sub-sets of the whole process which can be provided by third parties: for instance,

� Market and supplier research

� Pre-qualification process

� Auction / complex sourcing processes (e.g. optimisation)

� Elements of post-contract supplier management (e.g. audits or benchmarking)

Some activities fall under both the P2P and strategic sourcing headings; Supplier Information Management is one of those, which we will consider more fully in part 2 of this Paper. It feeds both the transactional process, being a key element of the supplier registration / enablement part of the cycle. But in terms of providing input that can be considered as part of the strategic sourcing cycle – for instance, risk related

information, or data that may form part of the qualification and supplier selection process – it is also an intrinsic part of that process.

Similar analysis might cover support areas within procurement, or the human resources aspects; do we want to manage recruitment and training internally or use external experts for instance. But the key is to identify a range of options in the first place.

Stage 2Having identified the potential activities that could be sourced from third parties, the next step is to assess which would show the greatest benefits if that step were taken.

Here are the main issues to be covered in such analysis.

� How strong is the current internal capability in that activity?

� Is there potential for improving capability if it is not currently meeting needs?

� How well-developed and capable is the market for external provision of that service?

� Are there clear benefits (direct cost saving or clear impact on procurement performance) from external provision because of the provider’s capability or the effect of aggregation?

� Will we give up the chance of gaining competitive advantage if we source externally?

� What are the practical issues around moving to external provision – cost, effect on staff (TUPE etc)?

Applying these key questions to the range of potential services can help to determine where the maximum benefit may be available, and help to clarify the nature of those benefits, as in the example below, (which shows just two potential areas of external provision).

This type of analysis can be applied in a structured manner across the range of potential service areas and can help determine where the external market may bring the most value.

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How to balance internal and external service provision – key decisions for procurement professionals

A Spend Matters White Paper sponsored by Achilles

Outsource area Positives Negatives Conclusion

End-to-end category management for ‘tactical’ spend categories

Outsourcer has greater capability in these categories

Can aggregate with other client volume to get better value

Lower operational cost (shared resource with other clients)

Give up chance to derive competitive advantage from these categories

Outsourcer needs managing – careful alignment of goals

Possibly worth pursuing for some categories – move to market testing phase with a view to a pilot

Supplier Information Management

Better quality of information if a specialist is used

More up-to-date, accurate broader range of data

Lower cost; in-house option can be very expensive

Take advantage of better IT systems than likely to be available internally

Support for suppliers completing the process

3rd party validation of data adds credibility

Potential for global visibility of its supplier ecosystem

Payment to outsourced provider by buyer or suppliers

Lack of direct control

Resistance from suppliers to providing data to third parties

Highly beneficial from a cost and quality point of view; few downsides. (n.b. Forrester3 report identified 41% savings in pre-qualification costs plus other benefits)

3. The Total Economic Impact of Achilles Supplier Information Management Solution, Forrester Inc, August 2011

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Part 2 Supplier Information Management5. What is Supplier Information Management?Supplier Information Management embraces the collection, evaluation and monitoring of information on suppliers and contractors including factual company information, risk evaluation, vendor appraisal and performance management.

Supplier information management marries three sources to create a universe of supplier information.

� The supplier’s view of themselves (e.g. who they are, who owns them, size, capabilities and qualification).

� Third party or objective information about supplier certifications, accreditation, financial or other data (e.g. reports and accounts, insurances, references and other objective qualification).

� Information from the buying organisation (e.g. spend, performance, bid history).

Many organisations will hold some data on the top 100 or so key suppliers, and a small amount of data will be held on all suppliers (at least enough to facilitate payment of invoices) but very rarely is information consistent, up-to-date and comprehensive. Moreover, supplier information is often distributed in different parts of the organisation, at corporate, divisional or operational level and, all too frequently, is housed in multiple systems in silos that are not always connected. Not to mention the different information requirements of different departments, regional locations.

Aberdeen Research4 recently suggested that ‘due to multiple systems, supplier information is often prevented from providing a holistic picture of a supplier due to lack of a unified supplier management process.’ The survey reported that 50% of respondents were found to be using between two to three systems that contain supplier information.

Why is it so difficult to get this right? Largely because gathering and managing data is a labour intensive and time-consuming activity. Information changes, grows or becomes out-of-date constantly, so work needs to be continuous and ongoing. While tools to help automate the process have become much more useful and more widely adopted, there is still a certain amount of laborious work which cannot be fully automated and needs to be carried out in order to refine and verify data.

To be positive, the good news is that there are tools and technology available now that can help organisations obtain and manage good quality data to help mitigate these risks. Yet our experience is that senior managers in most cases assume their organisation holds more and better data about suppliers than is actually the case. That is true even for basic administrative details, and even more so for complex, variable or time-related information.

4. Aberdeen Group. The year of the supplier, perspectives on supplier management in 2011. May 2011

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How to balance internal and external service provision – key decisions for procurement professionals

A Spend Matters White Paper sponsored by Achilles

6. Why does Supplier Information Management matter?In a recent research report, Jason Busch of Spend Matters US5 described the challenges that customers want to solve with Supplier Information Management.

� How can I bring more suppliers onboard, more quickly without increasing risk or the potential for non-compliance?

� Can I build a single platform to monitor my supplier facing interactions just as the commercial organisation can on the sales and customer service side of the house?

� How can I rapidly gain a common view into supplier information to rapidly take action to identify and implement cost reduction opportunities for my supply base?

� What are the best ways of creating auditable trails of correspondence and information capture with suppliers in the event that we need to later rely on this information?

� Are there ways that we can reduce costs and errors by automating traditional vendor management roles and supplier interactions?

� How can we systematically reduce our risk and exposure to the supplier financial and credit crisis? How do we know when to take proactive action? With what group of suppliers?

Assuming that this sort of information management platform can be achieved, what does it allow the buyer to do? It informs the whole procurement cycle, from choosing the best possible suppliers, evaluating and managing risk, enforcing global policies and standards, and enabling insightful spend analytics. Even focusing purely on supply chain risk management, we have seen a huge growth in the emphasis on this topic recently, which is not surprising when we look at some of the key issues facing buyers.

� Supply chains are longer and more fragile, and vulnerable to events such as natural disasters

� Supplier financial viability, and related operational viability, due to weakening balance sheets, failures amongst their customers etc.

� Supplier quality and performance risk including traceability of components or raw materials

� Greater regulatory and legal risk e.g., the Bribery Act

� More pressure from investors and a desire for stronger corporate governance

� Growing “corporate social responsibility” agenda highlights operational and reputational risk in the supply chain

But it isn’t just about risk management, important though that is. Enforcing organisational policies and standards includes elements of risk management as we described above. But it goes beyond that in making sure we obtain consistency and (where it is important) control including that single view of supplier information and data across the whole organisation.

Robust and accurate supplier information also enables and assists us to determine the best suppliers to meet our needs, making sure their capabilities fit the requirements of the buying organisation. That in turn leads to commercial advantage – after all, choosing the best suppliers is probably the single most important role of the procurement function in terms of creating competitive advantage.

Finally, a process for delivering good Supplier Information Management increases internal efficiency considerably. Aspects such as minimising the time that is spent on searching for information, checking, inputting and updating it, answering supplier queries, carrying out checks on accreditations; all of this can be very time consuming, and therefore expensive.

5. Spend Matters Compass Series: Leveraging Supplier Management Platforms for Multiple Goals: Risk Reduction, Supplier Diversity and CSR. 2010, Volume 4

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Getting accurate and robust information, right first time, can reduce direct costs considerably for the organisation

7. Key elements of a Supplier Information Management resourceSo what should we be looking for in a SIM solution? In the research series mentioned above, Jason Busch also outlined the key elements that a SIM solution should have in terms of underlying capabilities and features6:

... all Supplier Information Management solutions should have the following underlying capabilities and component features:

� Supplier portals for basic registration and as a single location to manage a profile and related information

� Supplier self service as part of a portal capability, enabling suppliers to access and update information online themselves rather than having to call a supplier management team member at the customer organisation

� Workflow and process management tools that, at their most basic level, allow procurement teams to route requests and automate registration and information gathering processes, manually intervening by exception rather than for each item requiring attention

� Data enrichment capability that provides additional information and validation outside of just supplier-provided information, for instance

� Integration into third-party systems

� Internal portal/dashboard views of supplier activity, ideally customisable, based on role, function etc

� Report and visualisation capabilities that provide standard reports

� Additionally, state of the art Supplier Information Management should provide the flexibility for information to be captured to adapt to changing requirements and according to a risk matrix determined by client and sector needs

8. Supplier Information Management as a strong candidate for external provisionWe’ve discussed the state of Supplier Information Management in organisations and our view that in many cases, it is not as good as it should be. So when organisations look at utilising external service provision, it may not be an “outsourcing” exercise anyway – that assumes something is being done internally already, which, as we’ve seen, is often not the case. But whether or not there is anything internal to outsource in the first place, we can use the checklist in section 2 of this Paper to assess whether SIM appears to be a strong candidate for taking advantage of external service providers. And the answer is a resounding “yes”. Why is that?

� Firstly, it is an important activity and some aspects of it are essential; it feeds into both the transactional P2P cycle and the strategic sourcing or category management process. It is not an optional process; it needs to be carried out and is a critical dependency for many other aspects of successful procurement.

� Service providers have the opportunity to leverage their work across multiple clients-obtaining reliable supplier information is time-consuming and therefore expensive, so spreading that cost makes sense. And much of what is needed is common to all the potential buyers who may be interested in a certain supplier. So the economies of scale are obvious in terms of engaging a provider who can aggregate their clients’ requirements in the SIM field.

� Linked to this point is the geographically dispersed nature of most large organisations’ supply chains. The work to gather the data therefore becomes even more onerous for any individual organisation, as the suppliers are likely to be domiciled in a wide range of countries around the world.

� Obtaining, verifying and managing supplier information is complex and requires a degree of skill and experience. It is not merely an administrative task that can be fully automated. For an organisation to develop such experience internally is therefore expensive, and the right skills are scarce.

6. Spend Matters Compass Series. Supply risk management - segmenting the technology and contact landscape and choosing the right category of solutions. 2010, Volume 4

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How to balance internal and external service provision – key decisions for procurement professionals

A Spend Matters White Paper sponsored by Achilles

� Supplier information is potentially high impact, high risk, and high value, so expertise is vital. It has become clear over recent years that understanding the supply base is vital, not only for purely commercial reasons but as a key element in risk management and mitigation. Many organisations have learnt to their cost that unawareness of what is happening in their supply chain is not an excuse that customers, media or investors accept lightly.

� While effective SIM is important, it is generally not perceived as ‘core’ business or a likely source of competitive advantage, so outsourcing does not sacrifice such potential benefits. But organisations taking advantage of external provision can still apply their own particular intelligence and strategy to the information obtained in order to drive such advantage.

We can see from this analysis that SIM is a very strong candidate for using an external service provider, and we have seen very strong growth in SIM solutions and service providers over the last few years.

9. Conclusions � There are many options for external service

provision to supplement activities performed by the internal procurement function, and the range of providers available across most areas of interest is growing. Services which can be

provided from external sources cover everything from outsourcing of specific spend categories, partial or total P2P outsource, or key areas such as Supplier Information Management.

� External provision can bring a number of benefits, ranging from taking advantage of provider economies of scale or labour arbitrage, to utilisation of scarce expertise.

� Given this, an absolutely central role for the CPO is to optimise the blend of activities performed internally and those delivered by external providers, across the whole procurement eco-system. CPOs should be analysing activities in a structured manner to develop, and then regularly review, their strategy for achieving this optimal blend of service provision.

� Supplier Information Management (SIM) is an interesting - and growing – example of an important activity which can be sourced from external providers, with resulting benefits to the customer organisation. It is gaining a higher profile as organisations better understand supply chain risk issues, but also the commercial benefits that are enabled by supplier information.

� That growth trend is likely to continue; and firms in the SIM field who can offer a combination of strong technology, customer service, and global reach are likely to thrive as more and more organisations realise the critical impact suppliers can have on their business. Knowing and understanding more about those suppliers will increasingly be seen as a strategic imperative for procurement, finance and business leadership.

� Supplier Information Management, on the face of it a simple activity, is all about creating a single, consolidated source of information – enabling an organisation to collect, maintain and aggregate information from all sources within the business. This transcends master data management – and creates a means to leverage all information enabling the entire enterprise to gain the necessary insight and opportunities.

Supplier Information Management using a collaborative model

Achilles Group Limited30 Park Gate, Milton Park, Abingdon, Oxon, OX14 4SH, UKT: +44 (0)1235 820813 F: +44 (0)1235 8211093 E: [email protected] W: www.achilles.com001-02/2012Printed on ‘Evolution’ Satin which is 75% recycled and uses ECF pulp

About AchillesAs Peter Smith describes, the management of supplier information isn’t often considered a core activity, it’s labour intensive, repetitive and many businesses don’t have the resources to devote to the task. This can leave organisations exposed to supplier non-compliance or unexpected failure.

Achilles offer a Supplier Information Management solution to provide businesses with one source of accurate, up-to-date and validated supplier information. The solution encompasses everything from finding and selecting potential suppliers, through to pre-qualifying, evaluating and monitoring performance. Each of these is an important step towards the continuous management of risk throughout the supply chain.

Thousands of buyers use Achilles every day to gain visibility of their suppliers, and with operations in 23 countries and 20 years’ experience, they can do so with confidence whilst unlocking tangible benefits of cost reduction, increased process efficiency and risk reduction.

About the Author - Peter SmithManaging Director, Spend Matters UK/Europe

Peter has 25 years’ experience in procurement and supply chain as a manager, procurement director, consultant, analyst and writer. He edits Spend Matters UK/Europe, and with Jason Busch, the founder of Spend Matters in the US, has developed it into a leading web-based resource for procurement and industry professionals. Peter is also Managing Director of Procurement Excellence Ltd, a leading specialist consulting firm, and is recognised as one of the UK’s leading experts in public and private sector procurement performance improvement. Peter has an MA in Mathematics from Cambridge University, is a Fellow and was 2003 President of the Chartered Institute of Purchasing and Supply, and his first (co-authored) book, “Buying Professional Services”, was published by the Economist Books in June 2010*. Before moving into consultancy, he was Procurement Director for the NatWest Group, the Department of Social Security (the DSS), and the Dun & Bradstreet Corporation, and held senior positions in the Mars Group.

Spend Matters is thankful for the support of Achilles, our sponsor for this paper. Spend Matters sponsors have no additional opportunity to influence the content or research of Spend Matters material or products relative to other software or services providers.

Further information on this topic and others can be found at the website www.spendmatters.co.uk, or we can be contacted at [email protected]. Reproduction of this publication in any form without prior written permission is forbidden.

*Buying Professional Services (Czerniawska and Smith, Economist Books, 2010).