Many years ago, one very large full-service BPO firm stopped working with me because I told them that procurement outsourcing was not on the radar screen of the average Chief Procurement Officer. Well, that was then and this is now. Procurement outsourcing has arrived. It may not be beloved by procurement leaders, but it is certainly on many of their radar screens. It is a topic that many of our readers have or will soon have to address. It is why we now commence a multi-part CPO Case Study or “Serial” on the topic.
Coming up on this season of CPO Serial: I interview the Chief Procurement Officer (CPO) at a large US-based manufacturer about his experience with a company-wide outsourcing initiative and how he and his procurement leadership team and the entire organization approached outsourcing. And so….
CPO Serial: Episode 1 – It Begins
Andrew Bartolini: Tell us a little bit about how your company arrived at the decision to outsource some of its procurement and accounts payable operations.
CPO: Our company had been facing serious competitive pressure in the market, and our Board had been looking very actively for efficiency and cost-reduction improvements – reviewing top-line and bottom-line measures that would improve our profitability. As part of a review of our cost structure, we brought in a consultant to look at our administrative staff overhead vis-a-vis market benchmarks, and somewhat unsurprisingly, the consultant found that we had higher overhead costs than the norm. They thought this was due to the fact that we had both kept most activities “in-house” and had been inactive in outsourcing. As our company has high retention, and you can say, pays market compensation in relatively high cost countries, our cost levels were relatively expensive for internal staffing versus external options.
AB: How did the executive management team decide that they needed to do this analysis?
CPO: The executive team sponsored the preliminary analysis. And of course, with all analyses that go back in time, the data was, to be honest,…somewhat questionable. But the analysis showed that we were in the third or fourth quartile as far as cost and efficiency in nearly all of our administrative functions. So, in other words, several of these non-core functions – which could be HR, Finance, IT, Procurement, Marketing and Communications – were assessed by the number of transactions they performed, the turnover that we had, the number of people, and the relative cost of those people. And almost all of them were assessed to be either third or fourth quartile versus market best practice.
AB: Got it. So they make a determination that they’re going to bring in this consultant to perform an analysis of the general cost structure of the non-strategic areas and given the legacy staffing model, costs are deemed high. How long does the project take?
CPO: The analysis and the presentation to the executive team took about six months. They made the recommendation for a new business structure for several non-strategic areas. In other words, the areas where the company did not aim to be Best-in-Class, is where the company would gain a substantial cost benefit if we moved either to a captive service center or an outsourced model.
AB: Right, okay, so when the recommendations came in six months after the project started, did it include any prioritization of functions? Did the consultant’s recommendations identify “potential cost savings,” or did they get more specific and lay out a road map of steps and/or actions that should be taken? What did the final report actually say and how was it acted upon by the executive team?
CPO: It provided a comparison of the different routes within the corporation. Their quartile performance – their performance in either the third or fourth quartile. And the potential opportunity size in terms of either moving to captive sourcing or an outsourcing model. And then from that list, several functions were shortlisted to pilot the new business model, after discussion, Procurement was selected as the pilot.
AB: So, how did you get that news? How was that determination made? Did you raise your hand?
CPO: My procurement leadership team explored much earlier the possibility of outsourcing some additional transactional activities. Our group had outsourced AP approximately 10 years ago to a third party. So, we knew this was possible; we considered outsourcing additional transactional volume because of our headcount constraints and the fact that many buyers who handled the transactional work at our organization were also doing part-time category management roles. So we had an interest in removing the transactional buying activities from our category managers where we knew there was more value having them focus on category management.
However, what we did not anticipate is that our own executive team, unbeknownst to us, and separate from our own proposal, had asked the consultant involved to push and give the most, you can say, extreme recommendation for what was possible, for either a captive or outsourced model. Based on this direction, the consultant had done an analysis, showing captive vs. outsourced activities and the headcount and cost savings possibilities. Captive would be retained by the company and outsourced would be moved to a BPO. So, for the 450 people who were mapped out as involved in the end to end Procurement process, the consultant’s recommendation was that 100 would be retained and 350 would be outsourced. It was a shock, to state the least.
Want to learn how this CPO and his team responded to the recommendation to outsource 350 positions? Then, watch for Episode Two of this CPO Serial.
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