Wednesday, December 18, 2013

Transition versus Transformation: Perfecting the PO Customer/Outsourcer Relationship by guest blogger Jack Hess

Procurement leaders may have a vision for where they want to go, but they often lack an action plan for how to get there. Others may have an action plan but lack the financial resources or bandwidth required to move forward. On a broader scale, companies often have severe pain points and change management issues but don’t know how, or don’t have the capabilities, to provide the appropriate corrective actions to resolve them.

With these challenges considered, it is not surprising that many enterprises are turning underperforming procurement processes and poorly controlled spend categories over to specialized providers of sourcing and procurement services.  Enterprises have been aiming to stabilize a core set of strategic competencies with focus on customer service excellence and outsourcing the non-strategic processes which do not impact customers directly.

Procurement service providers offer companies a slew of benefits: the ability to achieve realized savings targets, reduce cost for goods and services, deploy spend management best practices, leverage best in class e-procurement technologies, and deploy effective outsourcing processes – all without taking on the risks and assets required to achieve such outcomes internally within the organization.

In order for both the procurement outsourcer and the provider to succeed in a joint engagement, the provider must become a partner, which means they will have a flexible commercial model with agreed upon Service Level Agreements and a “skin in the game” commitment to support sourcing/procurement success, including tracking savings to the bottom line.

From a tactical point of view, understanding the interdependencies between an outsourced process and a customer’s overall business operations is a critical differentiator between transitioning a process and transforming it.  Once you understand factors like the enterprise spend, stakeholder compliance and requirements, inputs, handoffs, relationships, approval points, and the downstream ‘customers’, you can identify ways to also deliver continuous improvements.  Those improvements will ultimately transform the service into a true value-add for the organization, in addition to transitioning the processes.  Linking sourcing and procurement success to financial business outcomes with a potential 4+ X ROI is essential to long-term success of the project. Even more enlightening, progressive PO providers are working with customers to enhance the commercial model and make the financials more attractive by providing Self-Funding and P&L Positive models. This approach can reduce the risk for the customer and, oftentimes, even identify a payback timeline.

Having a service baseline and transition discipline in place allows a customer to truly understand and measure the improvement gains realized through an outsourcing partnership. Below are several more specific suggestions to consider when outsourcing and ways to perfect the provider/client relationship so both parties win:

  • Avoid the "lift and drop" approach. This is where a customer simply tosses a category/spend management process over the wall and expects a procurement services provider to deliver the process exactly, or better, as it was in-house. Very rarely will the process being outsourced have already been improved to maximum effectiveness, and even if it was a well-oiled machine internally, the economies of scale achieved through selecting a strong service provider should support reexamining the process.  An outsourcer who is truly a partner and has “skin in the game” will be honest about elements of the customer’s process and provide best-practice alternatives.
  • Process excellence must be part of the service. Most organizations seeking to outsource do not have the resources to run continuous improvement initiatives in-house. The service provider should fully understand the customer’s “as is” process and how it relates to other pieces of the business. With those things understood, the provider should then proactively identify comprehensive improvement recommendations before taking it over. Then, the improvement should be accomplished during transition from customer to service provider. Performing this step with process excellence in mind will allow for many benefits, including allowing the service provider to embed a sustainable continuous improvement strategy within the process. 
  • Understand the end-to-end spend management processes. This maximizes the engagement through sustainability. Knowing what inputs feed into an outsourcing process and how the deliverables from the process are used within the customer’s business is critical to success. By doing so, a long term transformation vision can be established, versus offering a limited, one-off outsourcing plan – this is the way to maximize the engagement. Sustainability of savings and continuous improvement can be achieved through a comprehensive end-to-end spend management approach including managing the enterprise spend through five simple, but, essential principles:
                 1. Manage spend in a competitive environment (when working with incumbents leverage
                     benchmarks and market intelligence for better results)
                 2. Manage spend utilizing contracts and agreements
                 3. Manage spend through compliance to contracts
                 4. Manage spend in a PO Management approval process
                 5. Manage spend through e-procurement technology

The sourcing and procurement services market is maturing rapidly with ever-evolving innovative techniques to provide breakthrough savings while greatly improving the end-to-end processes. To ensure maximum benefits are achieved in a PO engagement, it’s helpful to have best practices in mind at the outset of the relationship – such as those listed above. This facilitates a positive, and mutually fruitful, experience for both the provider and the outsourcer.
Jack Hess is Vice President of Solution Design and Transformation for Xchanging, Inc

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