The main reason companies choose to outsource is to reduce costs, however, a few poor choices and decisions can cause the advantages to come at a significant cost. For instance, you can outsource your manufacturing to China but it will affect your speed to market, innovation, etc. The same though does not apply to the outsourcing of certain non-core functional activities, like Procurement.
The past few years have seen an increase in the outsourcing of supplier management. The trend that I am referring to is that of “Managed Service Provider” – a concept that has been around for more than a decade now but has only started to evolve as a Procurement Outsourcing concept in the past couple of years. Today, organisations are looking at MSPs not only with the intent to outsource a certain activity, but to enable them to manage other suppliers that perform a given activity for the company. MSPs do not just offer relationship management, they also provide consultation on industry best practices, measureable and incremental ROI through managing the supplier base better. Both these tasks can be time-consuming and challenging, particularly if there are many suppliers to manage, alternative sources available and if the marketplace is dynamic due to any number of factors.
The concept of MSP, as referred to in this article, is different from what it means in the world of IT. IT MSPs are seen as a one-stop-shop for multiple IT needs – such as MSPs for outsourced application development and support, for computer hardware and for network management. What we are referring to is a supplier that manages other suppliers for a given category rather than providing services associated with that category.
The key benefit that a MSP brings to the table is improved spending visibility. To start with, MSPs were present in very data-intensive categories – temp labour, logistics, wireless telecom etc. Their primary responsibility was to analyse the service consumption data, look for optimisation opportunities to reduce spending. Gradually, they moved into the role of category management and took up responsibilities of payment aggregation, supplier performance review, contract renewals/amendments and so on. They have now become an extension of the procurement team. What sets them apart from an in-house procurement team is that they provide these services across multiple clients and hence offer insights into industry best practices, price and service benchmarks and other relevant industry information.
Some categories are more amenable to a MSP type of model than others. These are categories which are not the most critical to the organisation’s business model, but still have a high spend figure associated with them. High spend commoditised categories that have significant administrative costs associated with their management are the best choices for outsourcing to a MSP. Today, we have MSPs for logistics, temp labour, training, translation services, wireless telecom, travel (hotels/airlines etc.), facilities management and more. The graph below (based on the spend profile of a typical manufacturing/CPG company) illustrates that categories in the second quadrant are best suitable for the implementation of MSP. Also among these categories, the ones with extensive supplier proliferation, are the best bets for MSP implementation. For instance, temp labour is more suited for MSP implementation than MRO.
When looking for a MSP, a key thing to bear in mind is that there should be no conflict of interest between the suppliers and the MSP. While some categories such as temp labour and logistics have evolved to avoid this trap, surprisingly IT hasn’t. For instance, if you source the bulk of your temp labour requirements from Supplier X, you should not have them as your MSP as well. The incentives to uncover opportunities for optimisations are diminished. Secondly, sourcing a MSP is very similar to sourcing a consulting/professional services firm. You want to make sure your supplier has a track record of success and significant category experience for clients in the same industry as yours. It is important to do reference calls to check for thought leadership and innovation.
In my personal experience, I have seen significant savings come through the implementation of a MSP programme in Temp Labour, Travel, Logistics and Telecoms. It may be worthwhile to explore if you can generate additional savings for your client/organisation by rolling out a MSP program for high-spend commodity-type categories.