Spend Matters welcomes a guest post from Ken Hamilton of Xchanging.
The Procurement Outsourcing (PO) industry has rapidly emerged. It grew at 10% in the last year and reached $220 billion in terms of managed spend, according to Everest Group. They also predict PO to grow at a rate of 15-23% annually over the next 10 years. Yet, while the PO market is on the rise, first-time contracts are often leaving clients unsatisfied and hesitant to renew. In a two-part series, I’ll examine the common pitfalls that cause this phenomenon and the steps to avoid them.
Bringing on outsourced specialists to do what internal purchasing generalists are doing to achieve greater value, in many cases, does not necessarily define a lower-cost solution. Primary responsibilities of the outsourced specialists will be to drive measurable “realized savings” and deliver a reasonable ROI to offset the initial fees and travel expenses that come with starting a business relationship.
The PO’s measureable realized savings and ROI must help answer the Chief Financial Officer’s frequently asked and justifiable question: "Where are the savings?” If the PO team is able to provide them in a reasonable time frame after the contract has been signed, all is well. Unfortunately, getting out of the gate on measurable savings targets and establishing sustainable momentum is easier said than done.
Below are some of the common challenges and pitfalls faced when implementing a PO contract that can significantly impact value sustainability and cause first-time engagements to falter. These are by no means the only challenges that can occur but the ones that I’ve observed the most, so please feel free to share other ones you have noticed in the comment section below.
Low executive level sponsorship: PO contracts are typically sold at senior levels of client management (EVPs & CFOs). The execution of the contract then often occurs under the supervision of a middle management level of the retained internal procurement team (procurement manager or director). The internal manager or director at times becomes an insulating filter between the BPO team and executive sponsor. Without a very assertive and comprehensive communication plan, which includes steering committee reviews, quarterly business reviews, and periodic marketing intelligence, executive sponsorship tends to erode as a function of time.
BPO team – friend or foe to retained staff? In theory, the PO team of category specialists infiltrates the retained team like Special Forces. They collaboratively build a stronger and more effective proactive change agent to bring forward best-in-class spend management process, policy, and procedures. The concept, at least on contractual paper, seems reasonable enough. But human nature can come into play and alternative agendas begin to take center stage instead of the collaborative spirit.
Savings targets missed: Savings targets are often missed in the first year due to what is thought to be “addressable spend” and what turns out to be real addressable spend once the delivery team puts boots on the ground. The addressable spend has much to do with the influence of the individual business units and/or lack of influence of the retained procurement team. The internal procurement team may possibly inflate what they believe is “addressable spend” in the contract phase, and this can cause initial savings targets to also get inflated. When all is said and done, this becomes a function of relationship building and growing, as opposed to an inability to execute service level agreements or key performance indicators.
PO team reacting to status quo versus proactively driving change: I see this time and time again, where the PO delivery team loses sight of the fact that they were initially brought there to proactively drive change and deliver a valued comprehensive spend management product offering. Combining client drawbacks with a PO delivery leader that is many at time may not always be a seasoned business communicator to lead their team causes the PO delivery team to be beaten back into a relatively submissive tactical reactive role indicative of the client procurement culture, rather than one of a thought leader and change agent hired to bring forward a proactive best in class program.
Losing sustainability momentum: During the first year, it can be a common occurrence for the client to lose confidence in the value being delivered. Sometimes, this leads to the decision for them to build internally. This hazard is the most common result of losing sustainability momentum with the client. The justification of the fees/value ratio starts to wane and the client starts entertaining the “make/buy” thought process. The threat level fostered between PO delivery team and retained client staff drives this thought process since the procurement leader would often rather build his/her own procurement organization than be deemed non-essential due to an overly positive senior management perception of the PO team’s value.
So what is the solution?
The BPO business – and specifically, the procurement outsourcing business – is growing, but these common PO delivery road hazards are responsible for the less than favorable contract renewal rates in the PO space. This is because value sustainability is more about establishing the right relationships, using effective communication tools to maintain and build upon those relationships. Building communication plans right into the strategy from the onset will help teams avoid many of the common pitfalls, especially in the areas where senior leadership support is required. In Part II of this series, to come out after the holidays, I’ll share steps that both the PO service provider and client should consider to avoid some of the pitfalls described above.
As I have said many times since leaving engineering and entering the field of procurement outsourcing, this isn’t rocket science, but it is a lot of common sense and effective communication.