SM Compass: Designing an Optimal Procurement BPO Program: Process Expertise and Realized Improvement

Today, Spend Matters and HfS Research announce the first paper in their jointly authored research series: Expecting More From Procurement BPO. For those who don't know HfS, the firm has quickly grown from a means for CEO Phil Fersht to hide his costly single malt collecting habit from his lovely wife into a rapidly expanding global powerhouse on the BPO analyst front with an open expense account at all the Mandarin Orientals (and a few more dodgy establishments as well). While some might suggest the concept of this jointly authored series grew out of Phil's and my desire to collaborate on an analyst/research model in the spirit of the convivial execs in Mad Men, the truth is that we started working together on this thing because we were both flabbergasted by the opportunity that procurement BPO presents for many companies in contrast with the lack of sustaining value delivered in past engagements. Thus the charter behind this joint research series was born: to highlight how procurement BPO should work in practice based on lessons learned, both past and present.

When we first got together to brainstorm for this series, the first thought through our collective minds was simple: what's gone wrong in a market that should have grown much faster than it has in the past five years? After all, indirect spend, which represents the bulk of procurement BPO focus, remains a non-core area of purchasing and supply chain focus for the vast majority of companies we frequently engage with. And the honest truth is that the majority of Global 2000 firms aren't all that strong at managing all of the categories that come in under the SG&A line.

Moreover, many of the early internal attempts to target indirect spend inside companies came up short. From one-hit strategic sourcing consulting wonders whose savings benefits eroded for various reasons not long after the management consultancy left the building to greatly overhyped eProcurement and P2P programs that delivered expected results to only the top line of ERP providers and other software companies, many early indirect sourcing efforts looked great at first only to fizzle out over time.

So, do you see why indirect procurement looks like a BPO match made in "spend heaven?" We do. Transferring the ownership of actually achieving indirect spend results to a third party that signs its name on the dotted-savings line and letting it take full responsibility, allows the internal procurement team focus on the higher-touch opportunities and challenges of direct materials and services procurement sourcing, as well as broader supply chain issues (not to mention internal demand management and working capital). Sounds easy, right? Wrong.

One of the fundamental challenges of procurement BPO in the past was the belief that either the transference of labor from higher- to lower cost regions and/or the re-badging of employees from corporate to a BPO alone would be enough to achieve results. This is especially the case where BPO providers streamline transition costs over the duration of a multi-year contract, allowing the BPO customer immediate cost savings and limited (if any) upfront payments for resource investments.

However, while this can make everyone look good in the early stages (the provider rep for sealing a new client and the customer for achieving some immediate cost savings), these initial cost savings will slowly creep back if both provider and customer do not invest in new initiatives to improve their overall procurement functions. When you take process work and move it into remote locations, especially offshore, any inefficiencies are magnified if improvements are not introduced. These improvements should include process transformation, deploying new procurement technology, and laying down an agenda to innovate with procurement workflows and strategy in order to find new thresholds of productivity and/or top line growth.

If you're curious to learn more about how to get started on the right foot with procurement BPO, we encourage you to download this free Spend Matters/HfS Compass Series research paper. I think you'll be surprised how the two leaders of their respective publishing and analyst firms can sober up so quickly from the eggnog and office party season in their research and writing when they jointly consider such a critically important topic.

Jason Busch

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