All posts by Euan Granger

Outsourcing versus Insourcing – Where to Play When the Music Stops

In the fourth article in a series charting the key issues in public sector procurement, we examine the difficulties for organisations in deciding whether or not to outsource key strategic services and what this may mean for procurement.

I’ve been told in the past that procurement is a cyclical beast – the chances are high that a decision made today will be revisited in 5-7 years’ time and reversed, only for it to cycle round again at the next strategic business assessment.

One common example is centralised versus decentralised services and the level of autonomy business units are given. I’ve had the opportunity to witness this cyclical decision making first hand and have to say that, as much as it sounds fantastical, there’s a ring of truth to it.

I wasn’t long into my role with the organisation in question when the procurement department was pulled into a meeting with the Procurement Director. The purpose, ostensibly, of the meeting was to discuss the strategic direction of the department. However, the experienced members of the team knew exactly what was coming and they were proved to be correct.

The decision had already been made to centralise the procurement activities to one site (ours), with the Director justifying the move with talk of cost efficiencies, economies of scale and better governance over processes. This all sounded very sensible to me, a relatively green procurement professional. After all, the organisation as a whole had cost savings targets and to me it didn’t make sense to have everyone doing their own thing when it came to procurement.

It wasn’t until I sat down with my more experienced (and some might say cynical) colleagues that I fully understood what was going on. This was a strategic decision made by a new Director looking to put their stamp on the department. Not only this, but the department had only gone through an exercise of decentralisation 6 years before, with the move justified by talk of greater efficiency, more autonomy and procurement better able to service the individual site needs.

It became clear during my conversations with other department members that not only did they think this wouldn’t change the way the business worked (wasting time and money in the process), but that it would be reversed by the next Director in a few years’ time. I’d be lying if I said this whole thing didn’t confuse me, but I was to realise that this was more common that you might think as my time in procurement went on.

The Strategic Hokey Cokey

The example above is meant as an illustration of how strategic decisions can be made and justified no matter which side you fall on. It is neither complaint nor criticism, but an observation from someone who, at the time, had next to no experience in procurement. As time went on, I ended up procuring external services as part of a role, as well as managing an in-house manufacturing process for a procurement department.

The decision of whether to outsource strategic services, or keep the work and skills in house, is one that faces many organisations. Taken as part of the decision making cycle, it can begin to feel a bit like the hokey cokey. Insource this, outsource that, in-out, in-out, shake it all about and, frequently, hope for the best when someone comes asking about business costs and value.

But what is the best value approach when it comes to sourcing key strategic services? In the public sector, an argument could be made for outsourcing for budgetary or expertise reasons. However, the counter-argument relates to potential job losses and the erosion of workers’ skills, losing the option to bring them back in-house in the future.

The strategic services most commonly associated with outsourcing would include HR, Marketing, Finance and even Procurement. But in the public sector would there be an appetite for outsourcing procurement? And what could it mean for this and other services in the long run?

On the Way Out?

Fundamentally, it boils down to the question of whether or not the public sector could or should outsource their procurement function, and what the benefits would be were they to choose to do so.

We’ll come back to the first part of that question shortly. Ascertaining the benefits of outsourcing procurement is tricky, as any benefits tend to be subjective and wouldn’t necessarily apply to all organisations. There has been plenty written, too, on both sides of the debate, including a very interesting discussion on Procurious.

From a wealth of articles on the subject, the most commonly mentioned benefits to outsourcing a procurement function include cost reduction (relating to head count, training and access to resources); accessing expertise in a particular area in the market; a way of complementing existing resources; and the access to extensive networks of knowledge through highly-skilled procurement professionals.

However, on the flip side, there are also a number of negatives raised. Organisations can lose control over day-to-day procurement activities, and through this there is increased risk; there is a potential for the quality of the work to adversely effected; and although procurement has been outsourced, there will still be a requirement to purchase these services and manage the subsequent contract, which may not provide all the time-saving benefits first considered.

Instruct the Experts?

There are a number of organisations in the market that offer procurement as an external service – Capita, GEP and Capgemini to name but a few. The similarities between the services? All of these ‘consulting’ organisations highlight cost savings in their literature and focus on areas such as analytics, research and digital procurement (areas where many organisations lack both expertise and time to carry this out) as a core offering.

From this you would think that a consulting-led service would provide a very attractive option for the public sector. After all, it ticks all the right boxes – improved efficiency, reduced costs and expert-led services. Taken from that point of view, why wouldn’t the public sector choose to instruct the experts, use resources elsewhere and watch the savings roll in?

Apart from being a gross over-simplification of the issue, it doesn’t take into account the wider considerations of skills and training. A decision to outsource in the short-term could lead to a skills shortage in the long-term, and the loss of the opportunity to bring these services back in house without having to set up a new function from scratch (with all the associated costs).

For the public sector, there is an additional consideration – perception. Government, Local Government and Local Authorities have to be particularly careful, perhaps more so than private companies, with public perception and what may be printed in the local and national newspapers. A decision like outsourcing a service, which will be paid for with public money, and for which there may be associated job losses, may not meet the relevant criteria even taking cost savings into account.

The reality is that there isn’t really a right answer for this question and no one correct view in the debate. The right decision now may prove to be the wrong one in hindsight, or due to the cyclical nature of procurement and procurement strategy, may be turned a full 180 degrees a few years down the line.

That said, it’s no time for public procurement professionals to rest on their laurels. There’s plenty to learn and plenty to do – it’s just up to us to make ourselves so invaluable an outsourcing decision couldn’t possibly happen.

Critical Factors When Selecting Your Suppliers

Procurement exists in a dynamic, fast-paced, constantly changing environment. So surely the reasons we use to select our suppliers and supply partners would change over time too? Wouldn’t they?

It’s been over three years since the Procurious network was canvassed on what critical factors they look for in their suppliers. The world has moved on a-pace in the intervening period and it’s interesting to take an inward look to see if procurement has developed at the same pace, particularly in its supplier selection processes.

Gone are the days of the cheapest price (or at least they should be!). Gone, and consigned to a very dark part of history, are the days where supply decisions were made over lunch or in private meetings, and related more to who you knew than what you knew, which golf course or members’ club you were part of. Or even (sharp intake of breath) what you might be offering the buyers in return.

Even the list below, the key factors highlighted last time out, may have been superseded. So what are the new criteria? Or, if they are still the same, why is this the case?

Cost and Quality vs. Social Value and #MeToo?

If we take a look back at the responses from the network in 2015, we find ourselves looking at a list with a number of the usual suspects on it:

  • Cultural Fit – including values
  • Cost – covering price, Total Cost of Opportunity/Ownership
  • Value – value for money and value generation opportunities
  • Experience in the market and current references
  • Flexibility
  • Response to change – in orders and products
  • Quality – covering products and service quality and quality history

In addition to this, some that didn’t make the top 7 as it was included trust and professionalism, strategic process alignment and technical ability. There’s nothing that looks out of place on the list. In fact, they’re all eminently sensible and fair criteria to be considering.

The problem is it that it reflects a very traditional view of procurement.

Given the changing environment that procurement operates in, wouldn’t we expect to see these criteria changing too? In the past couple of years, geo-political instability has dominated the landscape and shows no sign of disappearing soon with Brexit and a potential trade war between USA and the rest of the world just two examples.

But what about the other factors we need to be considering? Social value has jumped to the top of many organisations’ lists, increasing work with SMEs and Social Enterprises. And let’s not forget an increased focus on harassment, discrimination and equal opportunities following #MeToo and campaigns like Procurious’ own ‘Bravo’.

What Does the Network Say?

When asked their opinions on what the critical factors were, the Procurious network highlighted the following:

  • Previous Safety Performance
  • Service Delivery
  • Efficiencies
  • Cultural Fit
  • Price/Cost
  • Flexibility
  • Ethics
  • Quality and Consistency
  • Supply Chain
  • Financial Stability
  • Environmental Policies
  • Communication

I’ve highlighted in bold the criteria that appear in the previous list that also appear in the new one. As you might expect, they are the common criteria that procurement are known for, and may be expected to deliver as standard.

It doesn’t appear that other factors in line with Sustainability, Social Value and Equal Opportunities (to name but a few) are getting much of a look in. However, we’d need a much bigger sample to be sure. And that’s where the wider knowledge base comes in.

Procurement’s Response

Having a trawl through the latest articles on supplier selection and key criteria two things struck me. One, there were very few articles, blogs, thought leadership posts or even research papers from the past couple of years. The most recent one I found was from early 2017 and even using a broad range of search terms, it was difficult to find anything relevant.

The second, and perhaps most surprising/concerning, thing was how few mentioned any different criteria for suppliers. Only one article I could find mentioned Social Responsibility or Environmental Performance/Sustainability. The remainder still focused on the criteria commonly found in a Commercial or Technical/Quality evaluation. The most common criteria still were:

  • Years in business and financial stability
  • Price/Cost
  • Quality and Delivery
  • Reliability
  • Communication
  • Cultural Match

What does this say about procurement? Is the profession still falling back on the old favourites when it comes to supplier selection? Or could it be that traditional “thought leadership” is no longer leading the way, and organisations are working differently without shouting it from the rooftops?

For me, it’s a combination of all of the above. There’s no denying that it’s hard to separate procurement from cost and quality (after all, it’s what we’re there to do). And why wouldn’t professionals use criteria that are both reliable and easy to measure, particularly when time and resources are tight?

Getting our Message Across

Speaking from experience, however, there are areas in which overall value is much more prevalent. In the Scottish public sector, organisations are mandating Community Benefits for contracts above a certain value. These can cover everything from creating apprenticeships to financially supporting community projects.

In addition, Local Authorities have started to mandate evaluation of ‘Fair Work Practices’ in all procurement exercises. Again, this can cover a multitude of elements, such as paying the living wage, no zero-hour contracts, equal opportunities and good training and development. Suppliers are being forced to consider these criteria to the benefit of their employees and the wider society.

There is good work going on in procurement, but maybe we aren’t making the most of communicating our message to the wider market. And if communication is one of the key factors in supplier selection and subsequent relationship management, it’s high time the profession started telling suppliers what is important to us and seeing what they have to offer.