Tag Archives: procurement outsourcing

Could Group Purchasing Organisations be Procurement’s Endgame?

Procurement’s fight for strategic recognition could be seen as a fight for its very survival. Could it be time to assemble around a collective idea before the endgame starts?

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Have you heard the one about procurement being outsourced as a function? Where organisations finally tired of not getting the value they need and hand over the reins to an external third-party to run the show? If that sounded like the lead in to a joke, it wasn’t intended as one.

Procurement needs to face up to the reality that if it can’t add value as it promises, then organisations may choose another route for the function. But where there is adversity, there are heroes to stand up. And with Group Purchasing Organisations (GPOs), these heroes are closer than you think!

Outsourcing Procurement

At the turn of the decade there was an increasing number of organisations picking this as their procurement strategy. More recently, and famously, in 2015, PepsiCo took the decision to outsource its marketing procurement function to much fanfare and no small amount of worry for the global profession.

It’s hard to argue against the benefits of this approach too, with cost reduction, increased leverage for discounts and economies of scale just 3 from a wide list. But don’t polish your CVs to find new career just yet. What if there was a way to get the benefits above, but retain control on your procurement and even free up time to allow for more strategic input.

The Avengers and Procurement?

Let’s look at this through a lens the majority of people will be familiar with. The meteoric success of the Marvel Cinematic Universe is based around the ability to tell a variety of different, diverse stories, but then tie up all of these strands into one, larger story.

The collective vision is why the first film in the series, Iron Man (2008) took $585 million at the box office, while the latest, Avengers: Endgame (2019) has taken in $2.796 billion. And counting.

From a procurement point of view, this collective vision comes in the form of Group Purchasing Organisations (GPO). There are numerous similarities between the Avengers and GPOs (bear with me!), but here are the top 3:

1. Leadership

The Avengers is a collection of larger-than-life superheroes, all with their own agendas, quirks and egos. What allows them to be an effective force in the fight against evil is that they have great leadership. Step forward Steve Rogers, a.k.a. Captain America.

What makes “Cap” a born leader is that he sets aside his own feelings and agenda for the greater good. He makes sure that every member of the team has a voice, even down to the smallest or newest ones.

And that is one of the key aspects of a GPO. It enables every procurement organisation to have access to the network, facilitating benefits that wouldn’t have been possible on their own.  These benefits, such as cost optimisation and savings via economies of scale go on to a different sort of leadership – cost leadership.

2. The Power of the Collective

Individually the Avengers were all quite stellar.  As Tony Stark himself puts it in The Avengers (2012), “a demi-god; a super-soldier, a living legend who actually lives up to the legend, a man with breathtaking anger-management issues, a couple of master assassins”, not forgetting Iron Man himself.

Individually, they were heroes, but none of them strong enough to defeat a larger enemy. Only by working together, and in Endgame having a second shot at it, did they possess sufficient power to be victorious.

A GPO ties together the varied procurement strategies of its member organisations, increasing the buying power of the collective.  The centralised procurement would provide great benefits without giving up any of the control.

3. Data & Analysis

Where would the Avengers be without the technology of Stark Industries, the nation of Wakanda or the power of Hulk? Just as important is the data provided by SHIELD and analysis that they rely on for running missions, frequently broken down for them by Vision.

A GPO has access to all the data that a procurement organisation would require for strategic buying, in the form of procurement solutions. Analytics organisations, like Sourcing Insights, provide all the back up required for successful sourcing, while ensuring that everything is managed against real-time, accurate data.

Procurement – Assemble!

It might not be the most obvious of matches, but there’s no doubt that for many organisations this could be a huge win. Far from ceding control of their procurement, they can pass over the transactional and highly resource-intensive aspects to someone else, meaning their procurement team can be strategic, like SHIELD.

So maybe it’s time for us all to embrace our inner superhero and take a step towards a collective vision of the future. Who knows, we might all together be able to save our great profession before the Endgame arrives!

If you would like to learn more about the super benefits of Group Purchasing Organisations and how they could assist with your savings agenda, please visit UNA.com today!

Procurement Outsourcing – What To Watch Out For

The advantages of procurement outsourcing have been well-documented, the disadvantages – less so. In this article Elaine Porteous outlines how the trend has evolved and minimising the risks associated.

By Raggedstone/ Shutterstock

The outsourcing of procurement tasks started off a couple of decades ago when companies found ways to process orders and invoices more efficiently. It grew and got labelled as procure-to-pay (P2P) and is still a popular solution for managing volumes of repetitive transactions. Tactical procurement, where low-cost/high volume commodities are being sourced is the next favourite area for outsourcing. Lately, procurement outsourcing has expanded into a wider range of activities, even moving into areas such as strategic category management, supplier selection and contract negotiation. Non-core services are the most likely candidates for outsourcing:  HR services, I.T. support, facilities management and logistics. 

According to CIPS’ definition of procurement outsourcing, it can also include “the provision of procurement services and processes within an operation which may involve the transfer of people and/or assets to another company.  Procurement service providers (PSPs) may have a full-service offering taking over the entire procurement function of an organisation.  Other smaller PSPs may manage only one element of a procurement function such as spend analysis or contract management.

According to McKinsey, to make strategic procurement outsourcing a success, companies need to take a highly systematic approach with three basic steps:

  1. They outsource strategic buying only in categories where doing so offers clear value.
  2. They have a precise understanding of the sources of that value and how to unlock it.  
  3. They choose outsourcing partners that have the capabilities to address those sources of value, then define and implement agreements that maximise the chance of capturing potential savings

The choice of a PSP depends on its capabilities, the size and complexity of the supply market and the buying organisation’s relative influence in that market; the expertise and availability of resources will affect the decision.   Outsourcing works best when the ability to manage a strategic category in-house is low.

Trends in outsourcing

There is a growing interest within procurement about outsourcing data-heavy activities such as spend analysis, supplier performance management and tender evaluations.  Tracking of realised savings has always been a headache and a topic of disagreement due to varying methods of calculation – by outsourcing this to specialists there is less room for debate. 

Governance, regulation and compliance is an area that is increasingly becoming onerous for companies, especially in the banking and healthcare sectors and is, therefore, a candidate for outsourcing.  

The outsourcing agreement 

When a decision has been made on what can be successfully outsourced a PSP must be selected in line with in-house procurement policy. This should include normal supplier due diligence to establish the company’s capabilities, including reviewing the supplier’s financial statements to ensure that the business is profitable and the supplier is not at risk of failure.  Next, the basis on which the partnership will work must be negotiated and confirmed.  The relationship needs to be formalised in a comprehensive contract with an enforceable service level agreement (SLA) that defines the rules of the game. Key performance indicators (KPIs) need to be clearly defined. These are the metrics used to measure performance and the calculation of bonuses.   

In the SLA, risks can be minimised by defining:  

  • Minimum acceptable service levels with penalties/incentives  
  • What happens when the PSP fails to deliver? Contingency plans
  • Who owns the data?
  • The PSPs responsibility for data security and confidentiality
  • Who owns the work developed during the contract?
  • What happens when there is a change in ownership of the PSP?

Managing the outsource partner

You have a contract in place and an SLA, what next?   The PSP is like all other key suppliers, it needs to be managed through the entire contract period.  Implementation is often the stage at which the outsourcing project fails. Stakeholders, if not consulted, can be obstructive and delay the process.  The manager’s role is to deliver the service to users, monitor the PSP’s performance, ensuring delivery against the pre-set KPIs.

Advantages and disadvantages of outsourcing

The advantages have been well-documented by the PSPs themselves, the disadvantages, less so.  Among the leading full-service PSPs are Accenture, Capgemini, Infosys and IBM.  The advantages are

  • Lower costs due to PSPs’ economies of scale by aggregating customers’ requirements  
  • Outsourcing low value/high volume purchases frees up internal expensive resources
  • Access to global expertise and market knowledge in categories where there is little in-house capacity or experience
  • Time-consuming negotiations and contracting are managed by specialists

Because outsourcing involves handing over direct control to a third-party it comes with challenges.  These may be service delivery issues, a lack of flexibility and unforeseen management crises at the PSP.  Open lines of communication at all levels are vital to the success of the contract.  Whatever the function being outsourced, the aim is to create a long term partnership that is designed to achieve more than just cost-cutting.