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Procurement Outsourcing: Warming to the Catalysts in Our Midst

Posted: 04/12/2018 - 08:53
Switching to outsourced strategic procurement and the steps to take

Making the switch to outsourced strategic procurement is not as simple as handing tasks and responsibilities to a third party. It requires wholesale change that starts from within. Someone in procurement needs to lead that change, and it may or may not be the CPO. What procurement needs to do is to find the catalysts in their midst.

A catalyst brings his or her own energy to each situation. If they are effective, they will also infuse others with that energy and rise as natural leaders. Catalysts are able to drive their own interests forward without supportive 'fuel' from their surrounding environment. The moment a catalyst engages represents a distinct milestone in the progress of a situation, group or organization. Because of their self-contained energy and willingness to pivot, a catalyst can break the inertia of the past and introduce new ideas and possibilities.

This all sounds very exciting…unless it is happening in your organization and you are one of the people being asked to change. Catalysts can also be quite intimidating. They demand change rather than accept it passively, and their natural pace can feel uncomfortably fast to others on the team. When you are outsourcing strategic procurement, it may feel like a time to be thoughtful, even cautious, but catalysts will drive ahead, more concerned about the risk of not changing fast enough than the risk of something going wrong.

The initial changes required for a company to benefit from procurement outsourcing are all internal. Tough questions have to be asked and answered, starting with ‘Are we currently structuring our procurement outsourcing relationships to achieve the stated vision?’ My experience as a buyer and supplier of strategic procurement outsourcing services suggests that the answer to this question is frequently no.

In the book Vested Outsourcing, Kate Vitasek describes four tiers of supplier relationships: transactional suppliers, preferred suppliers, performance partners and strategic allies. With each increased level of complexity and closeness, the potential for reward increases. 

Few procurement professionals have misconceptions about which supplier relationships are transactional – they are denoted by cost-driven contracts, PO-based purchases and easy substitution. The challenge is being able to differentiate between suppliers at the other three levels: preferred, performance and strategic.

When it comes to procurement outsourcing or procurement-as-a-service (especially category management and sourcing), the target should be to create a performance partnership with the provider. The outcome of this partnership should be a solution that measurably achieves the objectives of both companies. 

Despite how desirable that level of partnership sounds, its description includes a lot of ‘shoulds,’ usually an indication that a lot of work and change will be required. Although most companies evaluate working with a procurement outsourcing provider because they need help, the first step to realizing the full value of their investment is to prepare internally. Procurement must redefine their strategies and expectations...which brings us back to the importance of the catalyst. What needs to change – NOW – so that we can outsource strategic procurement?

If you are considering engaging a firm to access their subject matter expertise and market intelligence, here is what you need to change: 

Stop Focusing on Savings: The success or failure of most strategic procurement outsourcing engagements is defined by cost savings. While this aligns with the way CPOs are measured, it denies providers an incentive to emphasize other sources of value as well, and may even misdirect their efforts. An overly aggressive pursuit of savings may cause collateral damage and ultimately do more harm than good – for the provider and for the procurement team that brought them in house. A catalyst will look at this challenge and say, “You saved me money, and that’s great. But what did you create?” As the savings figure grows, the spend shrinks. At the end of the day, procurement needs to build the enterprise up, not just minimize its footprint.

Guard Your Stakeholders Jealously: A procurement outsourcing arrangement is temporary, but stakeholder relationships are forever – at least to procurement’s stakeholders. While strategic procurement outsourcing will undoubtedly bring the provider into contact with stakeholders, procurement cannot relinquish responsibility for the relationship itself. Differentiating day-to-day support on the project from the day-to-day impact on internal colleagues is critical, and it requires a coordinated approach to change management. You will be glad you retained ownership of the relationships, as these things have a way of coming full circle. Returning back to our catalyst, reinforcing internal relationships is another opportunity for change. What is working – and not working – about procurement’s relationships with stakeholders? Engaging procurement outsourcing – and introducing the firm that will be doing the work – is a key opportunity to realign and refocus this relationship all around.

Embrace the Unexpected: The only certainty is that all things change. And yet, a needs assessment is always somewhat limited by the information available. If you must sign a long-term contract (anything over a couple of years in duration), procurement must build in optionality and downside protection. I once inherited a seven-year multi-tower outsourcing deal with no downside protections. Two years later (with five to go), my company nearly halved in size. The fallout damaged the buyer/supplier relationship beyond repair to the detriment of both sides. Preparing for the unknown is a key opportunity for a catalyst. He or she will see openings to create new value, build new relationships and try new approaches. Every unexpected event becomes an invitation to innovate irrespective of the ways of the past. 

Expect the World from Your Provider – and Then Expect Even More of Yourself: If the goal is to outsource some of procurement’s strategic responsibilities, we need to ensure that they are not downgraded to a tactical level of management. Is your service provider an innovator? How do you know? Are they innovating the offerings of existing clients, or just new customers? Delivery models and the accessibility of technologies such as artificial intelligence (AI) and machine learning are redefining the capabilities and efficiencies of strategic procurement services. Procurement needs to ensure that their performance partner delivers to the full extent of their abilities. Once again, this is rich territory for a catalyst. Give them more resources and the foundation of work from an outsource provider to stand on and they will conquer the world.

Working with a performance partner to optimize procurement’s results is a time-tested approach – especially in cases when procurement has bandwidth or subject matter constraints. Procurement’s ability to drive value through the relationship requires a two-way partnership: we partner with them and they partner with us. A catalyst will ensure that their efforts, plus the efforts of the outsourcing provider, result in a 1 + 1 = 3 situation. Rather than the work being ‘out of sight, out of mind,’ procurement’s role and responsibilities must change – setting a high bar and taking an active role to ensure overall success.

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About The Author

Philip Ideson is the founder, editor and host of the Art of Procurement Network.  His prior experience includes work at Accenture, Ally Financial Inc., and Chiquita Brands International Corporation. 

The Art of Procurement podcast delivers multi-channel learning and development programs to help procurement leaders increase the capabilities of their internal teams.