Indirect Outsourcing Overview from Archstone

So you may have outsourced your IT infrastructure, your application development and maintenance, even some of your finance functions -- but have you considered outsourcing your indirect procurement? Procurement outsourcing is increasingly becoming a priority business strategy for organizations around the world as they react to global market dynamics and execute their business objectives. Though many companies have or are considering IT and finance outsourcing, some are now looking at indirect procurement as a value driver for increased bottom line savings. Indirect procurement outsourcing savings usually exceed savings from other towers, such as finance, exponentially. To truly achieve those savings and create an environment for additional value creation with a third party provider, detailed effort and proper contractual requirements need to be applied to develop statements of work, service level agreements, agreed-to savings calculation methodology and other contractually required documents to ensure a successful partnership.

Choosing the Right Provider
It is important to understand the overall outsourcing strategy when identifying possible partnerships. Many providers have global service delivery capabilities and ability to perform multi-tower (finance, IT, HR, procurement) processes, thus reducing your supply base and governance support should other functions in your organization decide to outsource. However, some providers are solely focused on sourcing and procurement in specific geographical markets representing a best of breed solution for your specific category requirements such as MRO or advertising.

Statements of Work
Statements of Work need to be very detailed and contain a responsibility matrix to avoid confusion and finger pointing as to who is responsible for a given task. All too often, SOWs are too general and lead to relationship problems, where the client believes the work is covered under the agreement and the service provider feels it is additional scope, wants a change order and increase in pricing. This is where the relationship begins to break down.

Service Level Agreements
Service levels should be only high enough to deliver the expected value. Gold plating SLA's leads to unnecessary added cost with limited to no additional value. Specific and targeted SLA's should also have financial penalties that are meaningful to ensure the service provider is focused on those performance areas that truly affect the business.

Identified vs. Realized Savings
Many service providers will perform a sourcing effort to "identify" potential savings. Although this process is required to contractually buy the goods at lower prices, they are only savings on paper. It is imperative to "realize" those savings at the bottom line, which means driving compliance and demand management. Reducing budgets accordingly is one way of ensuring those savings are realized. A contractually agreed to, detailed savings methodology is essential to any outsourcing contract to ensure both parties agree to how the savings are calculated. Service providers should have their fees at risk for missing savings targets.

Governance Organizational Structure
Governance organizations should, at minimum, have individuals that align with the service provider's structure. Individuals responsible for the relationship management and communications, as well as contract, finance, and performance managers are required with any governance model. The governance team must be empowered to either resolve or quickly escalate issues to senior management to avoid minor issues from becoming major problems. Furthermore, the governance team should have a clear view of business strategies, objectives and future requirements that may affect the agreement. And, as in any BPO arrangement, it is imperative that a strong governance executive effectively communicates not only issues and strategies associated with the agreement but also corporate objectives. Outsourcing is not abdicating responsibility; it is simply one aspect of an effective service delivery model.

- Maureen Piché, Principle and Mark Woessner, Director, Archstone Consulting

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