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Designing an Optimal Procurement BPO Program

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Published:  May 18, 2012
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When Spend Matters and HfS Research decided to jointly cover the procurement BPO market in this research series (this paper is the first in a multi-part research agenda), 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, for the vast majority of companies we frequently engage with, indirect spend, which represents the bulk of procurement BPO focus, remains a non-core area of purchasing and supply chain focus. 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.

Yet if procurement outsourcing history is any lesson, procurement BPO engagements come with as much potential baggage as upside. In this research series, starting with this first paper focused on optimal program focus and design, we'll examine how companies can – and should – get more from procurement outsourcing initiatives, tackling primarily non-core areas.

In our view, the fundamental challenge 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.

Our research suggests that this type of behavior – along with other indirect spend challenges –ultimately led many of the early third-party attempts that targeted indirect spend inside companies to come 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 (one of the challenge is that 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).

This jointly authored paper examines this and related challenges, providing context for designing and making procurement BPO programs work from the start while continuing to deliver value over time. It sets the stage for a Compass research series that will cover as much where companies should focus their procurement BPO efforts as where they've created potentially misaligned programs in the past.

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