The Upside Of Offshoring Procurement

Unlike many other areas of outsourcing, anticipated cost savings on the procurement and supply-chain management front are not likely to come from significant reductions in headcount. That's because, at TXU and elsewhere, relatively few employees tend to be involved in these activities, even when they're scattered across different departments, geographic locations, or corporate divisions. The objective here, explains Laura Powell, Capgemini Energy's supply-chain service-line leader, is that "by outsourcing these functions to a firm like ours, clients can achieve price reductions through our greater sourcing expertise, purchasing leverage, and ability to continuously sustain savings over time."

Powell is convinced that the strategy offers other benefits as well. "This process really is a transformative one," she emphasizes, "because there are other efficiencies and improvements that can be achieved with outsourcing." These include reductions of inventory levels, compression of delivery times, company-wide implementation of advanced e-procurement systems, and change management to encourage high levels of compliance with supply-chain goals.

In industry jargon, all this is known as P2P (procure to pay), S2P (source to pay) or S2S (source to settle). As an outsourcing trend, this one is relatively new, and it may never catch up with the popularity of customer-care or IT outsourcing, if only because the anticipated labor-cost savings just aren't comparable. But the comprehensive outsourcing of procurement and supply-chain management certainly has begun to happen, and it will undoubtedly pick up speed, if only because there are growing numbers of would-be providers aggressively making the case to large corporations.

Ironically enough, the biggest obstacle blocking progress in this area is, quite honestly, most companies' lack of attention. They may be eager to find ways to improve the costs and supplier relationships tied to their direct, or strategic, goods and services, but there's little management incentive to entrusting these to any outside firm. On the indirect side, once corporations make the switch to an e-procurement system, they usually figure they've done what they can to control costs. And that's typically true, unless they've got a willingness to embark on the kind of substantive, often difficult, corporatewide changes that a comprehensive outsourcing arrangement would entail. Without the allure of obvious labor savings, many companies haven't identified the need or the potential reward.

While this type of outsourcing isn't for every company, e-procurement and supply-chain projects do offer tangible ROI. Since potential rewards may be difficult for a company to identify on its own, most corporations don't pursue these opportunities without first engaging a strategic consultancy. In fact, these days, it's usually the strategic consultants who initially propose the idea for consideration. The strategy piece typically includes an analysis of the ideal approach to implement the project and, in particular, whether this type of work is ideal for offshoring.

Early On
Companies such as TXU are trying it out on themselves first, with the hope that they'll eventually be able to profitably service others in focused industry niches. Accenture is aiming to leverage its IT consulting ties into broader P2P outsourcing relationships with major global clients; already, it has landed a couple of soup-to-nuts deals, most notably with Deutsche Bank. IBM, meanwhile, recently positioned itself for a big push in this area with its December acquisition of KeyMRO, a French provider of internet-based procurement services which was founded by Schneider Electric, Rhodia, and Thomson Multimedia in order to control their own procurement costs. As part of the sale, all three companies signed seven-year procurement-service agreements with IBM.

Offshore providers already are playing an important role in these areas, although there's an assumption, at least for now, that compelling geographic requirements will necessitate onshore handling of client and key-supplier relationships. So, for example, Capgemini Energy will offshore services such as order setup, data refreshes, and physical creation of spending reports for TXU and any other utility it may sign up in the future. But other parts of the P2P process will be handled by "demand managers": experts in this field who will be "embedded" on-site in corporate headquarters in order to facilitate strategic sourcing, in-depth procurement analysis, and other specialized activities.

This is all so new that it's rare to find corporations that have decided to fully outsource their P2P functions. But many large companies either already have heard the pitch or they'll hear it soon. Fortunately, it's worth some consideration, since in most global corporations, a powerful case can be made for transferring part or all of this process to procurement experts outside the company. Among those businesses that stand to benefit most are those that have grown through acquisitions without fully consolidating their procurement and supply-chain management functions (see box).

When Accenture argues this outsourcing case, it starts, of course, with dollars and cents. "It all comes down to this—there are two types of costs: the amount a company pays to its suppliers and the amount it pays to administer its purchases," explains Jeff Zaniker, the Indianapolis-based vice president of business development for Accenture Procurement Solutions. "This proportion of costs is always heavily skewed toward the first category," he adds, "so that for every $100 a company pays to its suppliers, it pays one or two dollars for administration. When we go after this type of engagement, our business case to a company is not 'How do we reduce the $2?' It's 'How do we lower the rest of the cost?'"

Like Capgemini Energy, Accenture is convinced that the big payoff from P2P outsourcing is, ultimately, all about business transformation: the kind of leap-frogging developments that can take place within an organization when advanced technologies and financial strategies are implemented companywide, especially in areas that have previously lagged in investment or attention. "All this represents a fundamental change in the options now available to a company," says Zaniker.

He adds, "Our goal is to help companies spend less, get more value, gain flexibility, and use our global delivery network to make sure that they're managing their total spend most effectively." That delivery network includes captive centers in Manila, Bangalore, and Barcelona, which will handle system maintenance related to e-procurement and supply-chain management technologies. Other support services, such as accounts payable, data generation, and call-center activities (to handle those "Help, we need printer cartridges!" calls) will also be offshored, as part of a continuous effort to drive down costs.

Fitting The Profile
Wondering whether e-procurement and supply-chain management outsourcing could be right for your company? You're likeliest to benefit if:

• Your company has grown through acquisitions: This isn't a no-brainer, but corporations that follow this growth path often fail to consolidate purchasing and supply-chain operations companywide; that may leave room for improvement;
• Your company is large: Avinash Vashistha, of neoIT, suggests that companies with revenues of $1 billion or more may benefit from the switch;
• Your company is multinational: Many firms that purchase supplies or services on multiple continents have inefficient, redundant processes in place.
• Your handling is labor-intensive: If your procurement functions are fragmented across multiple departments and locations, it's always possible that your company can realize additional savings through workforce reductions;
• Your spend is heavily skewed toward indirect purchases: For banks, insurers, and others who don't make many strategic-goods purchases, there's even more chance for savings;
• You're not paying attention: Plenty of companies are "guilty as charged" on the indirect side. You may not be able to estimate how much you're overpaying, or how much you've been losing through "maverick" purchases, but an outsourcing firm should be able to quickly help you identify current weakness and potential savings.

Upside Of Change
Contrast this well-oiled machine with the sorry reality that exists in many companies, even large, otherwise well-managed ones. In a nutshell, procurement is a complex procedure that involves various levels of internal communications within a company, multiple interactions between buyers and sellers, all kinds of recordkeeping, and more—even to support the purchase of a single prosaic item like typing paper. Yet, some companies do not even have procurement departments set up to handle their "indirect" purchases, meaning those goods and services that are considered non-strategic to their core businesses. That can add up to a costly oversight, since experts estimate that indirect purchases may account for more than 50% of a company's total operating expenses.

The types of problems that exist in this arena are truly extraordinary, even in sophisticated global corporations. "If they have grown through a process of acquisitions, they may have a number of different procurement processes in different locations or divisions," describes Patrice Gilles, the Dallas-based procurement practice leader of EquaTerra, an outsourcing advisory firm. "And there are many companies that lack any internal ability to perform detailed procurement analysis when it comes to their indirect purchases. So, they may know that they spent a certain amount of money on office supplies, but they may not know how much they paid for paper clips, writing instruments, different types of paper, and so forth. Therefore, they don't even know what they could be saving. Or they might have purchasing guidelines in place, but not know how many employees are complying with them."

Do any of these problems sound familiar? Or are you simply intrigued by the benefits that might result from passing these responsibilities to an outside firm with purchasing leverage, sourcing expertise, and an offshore network to help cut costs?

Although there isn't much of a track record in this area yet, it's already clear to procurement and supply-chain experts that some elements are essential to enable P2P outsourcing deals to succeed. "The most immediate best practice—and this is an absolute requirement—is that a company must have an e-procurement system in place," emphasizes Pradeep Bahirwani, general manager of the procurement and supply-chain practice of Wipro Technologies, based in Bangalore, India.

Since technological expertise is a must-have in this newly emerging, outsourcing field, firms like Accenture, IBM, and Capgemini possess a leg up. Wipro can also compete, emphasizes Bahirwani, because "a company likes ours can help clients implement the appropriate technology or consolidate if there's no underlying system across multiple locations." But, he stresses, "if these functions are not automated, there's no way that any outsourcer can access information, develop appropriate processes, fix gaps, and offshore whatever operations don't need to be handled on-site."

Technology can only accomplish so much, however. Procurement and supply-chain management outsourcing depends upon procedures such as pre-negotiating contracts and establishing strict purchasing guidelines for everything from toilet paper and airline tickets to laptops. Even the centralized tracking of product warranties and contracts represents a big win for corporations. Companies, therefore, need to address what Capgemini Energy's Powell says is the "fear of losing control."

There are "certainly checkpoints in place," she emphasizes. "But management needs to understand and buy into the benefits of consolidating these systems, of driving towards standardization, and of passing responsibilities along to a firm like ours, which is capable of benchmarking, achieving, and score-carding high levels of performance goals." Outsourcing providers are also hoping that managements will buy into the notion that supply-chain outsourcing can yield a process of continuous improvement and cost savings beyond anything they can sustain on their own. That's likely, but not inevitable.

In the meantime, there's got to be a "strong stomach for change" in any company making the switch, according to Gilles. "Procurement touches every single individual in a company, which means that the change management piece is very big. For a transition like this to be successful," she warns, "the change-management component needs to be very strong," which is something companies need to consider when evaluating potential outsourcing providers. "You can set up the best systems, you can have all the tools in place, but unless everyone in the company understands the importance of all this and goes along with the new arrangement," she emphasizes, "you have accomplished nothing."

Despite growing interest within the past year or so, it's worth pointing out that this outsourcing trend faces what may be significant limitations. "If a company is looking to outsource a business application, it would normally choose a much larger business process," explains Avinash Vashistha, a managing partner, based in Bangalore, of neoIT, a global-sourcing adviser. "With customer service, you've got tons of people working on it, and much of what they do is replicable. Procurement is not a very large process. There are not a lot of people involved, and it's not very easy to automate what they do into one process and then outsource it."

This is not to say that there aren't likely savings and greater efficiencies to be achieved from switching to P2P outsourcing with the right provider. But without large labor savings to motivate them, companies may lack sufficient motivation to embark upon an internal cultural revolution. "These are changes that need to come from the corporation itself," Vashistha contends.

Another major limitation results from the distinction between indirect and direct purchases. "In most companies, direct-material purchases tend to be extremely well-managed and highly integrated into corporate operations," notes Gilles. Supplier relations and purchase-price negotiations in this arena typically are viewed as part of a company's competitive advantage; therefore, it's unlikely that many companies will ever choose to transfer their direct purchases to a third party, especially one that might also handle their competition. "On the other hand, indirect good procurement has tended to be neglected," she adds, "because it's viewed as a necessary evil and not as a strategic transaction. So, the existing situation is a little anarchic."

That anarchy creates opportunity but also confusion, since it's difficult for companies to project just how much they stand to gain from making a full-scale switch. "We did a study for a large oil and gas company," recalls Bahirwani. "This company is very good with its purchases of direct materials, but we wanted to see how good a job it was doing with indirect procurement." In this particular company's case, a close examination of purchases taking place in several of its different locations found that "60% of the indirect spend was in maverick purchases. There were no pre-negotiated contracts and no pre-approved suppliers. So, there clearly was more value to be had in cutting these leaks than in just outsourcing some jobs offshore," he explains. "We told the company that we could help it by automating its procurement processes across locations and improving overall compliance."

Most outsourcing providers are building a lot of flexibility into their pitches, so they can start demonstrating results through the focused outsourcing assignments that are, so far, easier to land. Wipro, for example, has yet to win a full-scale outsourcing contract in this area, at least in the U.S., but it's done a good bit of work on matters such as supplier-compliance audits.

This is a trend that will accelerate, but it may take a while to gain mainstream acceptance. "For a lot of companies, there's other, lower-hanging fruit that they'll go after first," says Bahirwani.

Next Steps
For companies interested in investigating their potential rewards, as well as any challenges they might face in making this switch, it makes sense to consult a strategic expert. Start with consultants that have worked successfully with your company in the past, perhaps on the implementation of e-procurement or supply-chain management systems, or on the outsourcing of other business applications.

• The analysis phase will be a relatively quick one—after all, consultants still can't bank on most companies going along with a full-scale project. Be prepared for some frustrations during this period: Most companies don't have an abundance of in-depth information to pass along for evaluation, in large part because they haven't devoted much attention to indirect procurement and supply-chain management in the past.
• Companies might best be wary of any outsourcers who promise to keep costs low by offshoring an entire P2P project. As of now, at least, most experts in this area are convinced that there are some aspects of this process that can't be offshored, because they demand close contact with corporate clients and key suppliers. The exceptions to this are multinational companies (MNCs) that have non-standardized procurement approaches, obvious waste, and inefficiencies.
• Before signing on the dotted line with any outsourcer, companies should evaluate the firm's ability to help employees and managers navigate what may be a pretty rocky period of change.

For corporations that are still hesitant to make a full-scale switch, there may be useful ways to outsource smaller procurement or supply-chain management projects that offer the potential to expand gradually. Accounts-payable functions, employee-order call centers, various types of data generation, and supplier-compliance audits are all worth considering and typically offer significant cost-savings, since they're easily offshored.

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