Best Practices for Bringing in Third Party Service Providers

Spend Matters welcomes another guest post from Teja Kappagantula of GEP.

Many organizations undergoing procurement transformation engage external service providers to hasten up the transformation journey and bring in returns sooner than anticipated. But not everyone is successful. Bringing in a third party service provider sometimes turns out to be a detrimental decision, especially when the integration falls through and does not result in the intended benefits. So what are some of the best practices in engaging a third party service provider for a procurement transformation journey?

Clearly define the type of third party services required. A simple 2 X 2 matrix with the capabilities of the procurement organization and its capacities will tell you what type of service provider is best suited for your needs:

  • When both capabilities and capacities are low (i.e., the procurement team does not have the sufficient capabilities to meet the post transformation targets set by the business, and the procurement team is woefully short of resources to even attend to the day-to-day tactical and transactional requirements of procurement), it is important to engage with an end-to-end service provider that can provide strategic, tactical, and transactional services.
  • Capabilities are high and the capacities are low. In this case, an outsourcing service provider is better suited to bring in high efficiencies in the tactical and transactional procurement tasks. This should free up some of the time the capable internal resources spend on non-strategic activities.
  • Capabilities are low and the capacities are high. In this case, the service provider should be someone with strategic procurement expertise in the organization’s line of business.
  • Capabilities and capacities are high. Engaging an external service provider is redundant and unnecessary.

Though this type of assessment is easier said than done, what really helps is an honest assessment of the internal procurement organization’s capabilities and capacities.

Look for value more than cost savings. Many organizations focus too much on the cost savings while evaluating the external service providers. However, when selecting a partner for a procurement transformation journey, it is important to understand when and how the potential partner can help the organization achieve the effectiveness and efficiency targets. This “when” and “how” should form a basis for service provider selection, but not the cost of engagement and the savings proposed. An organization that selects the service providers on the basis of cost savings alone fails to truly transform its procurement organization in the longer term. The result is that it gets saddled with an incapable or underachieving internal procurement team.

Integrate well. Integrating the external service provider’s team into one’s own procurement organization should be done so well that the service provider’s team is no longer external and is just an extension of the procurement team. The important aspect of integration involves IT systems. It is essential to constitute a cross-function team for smoother integration.

Organizations that achieve success in their procurement transformation efforts are the ones that were pragmatic and patient in their approach towards engaging an external service provider, which helps them reap long-term benefits.

For more interesting thinking on procurement, visit the GEP Knowledge Portal.

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