The core conundrum

A growing number of organisations are choosing to outsource some, or all, of their procurement functions. SM gathered a panel of experts to discuss the issues

The participants

Keith Airey was, until recently, a director in the business process outsourcing unit at PricewaterhouseCoopers, where he managed global indirect procurement for Nortel Networks. Prior to that, he worked in the international procurement team at SmithKline Beecham.

John Armstrong is a senior consultant at Orbys Consulting, a leading European outsourcing advisory firm. He has over 30 years’ experience in procurement and contract management, most of it at BP where he spent the past decade managing a variety of IT outsourcing projects.

Andy McCann is head of purchasing and supply at SureStock Warrington, where he manages the outsourced procurement and logistics function for North Cheshire Hospitals NHS Trust’s Warrington site. He has spent half his career in the health sector and half in computer manufacturing.

Alex Milward is a partner in the global supply chain practice at Accenture. He leads its cross-industry UK procurement consulting group and was part of the team that ran outsourced procurement services for Thames Water. Accenture’s own purchasing is outsourced.

Guy Strafford is client services director of Buying Team, a 60-strong procurement services consultancy that he co-founded in 1994. Its outsourcing and category management clients include Six Continents, Universal Music and RoadChef.

Peter Rushton is executive director of trading at Xchanging Procurement Services, an outsourcing provider whose clients include BAE Systems. He is a former European and group purchasing director of Caradon (now Novar) and head of procurement for British sugar.

Geraint John is editor of Supply Management, and chaired the discussion.

Geraint John (GJ): Let’s start by looking at the question of why organisations would want to outsource their procurement in the first place. Isn’t procurement a so-called “core competence”?

Guy Strafford (GS): Most of the organisations we deal with are under-resourced in procurement. There aren’t enough people in it and they haven’t got the right breadth of skills. So procurement outsourcing is a way of bringing in additional resources and skills. But every business in the UK outsources certain bits of its procurement already. We could go and source all of our insurance or travel needs ourselves, but we don’t, we go to a broker or travel agent. So for me the question is not whether businesses should outsource procurement, but what is the boundary at which they should stop outsourcing it.

Andy McCann (AMc): Some of the drivers in the NHS have been high product and process costs, and poor service delivery. It’s about investment, not just in e-procurement systems but also in staff development. The NHS hasn’t traditionally invested in co-ordinated people, processes and technology.

Keith Airey (KA): That’s right. And a lot of organisations we were talking to didn’t actually have a procurement department.

Peter Rushton (PR): In today’s business climate there is also a demand for a more radical, step-change agenda. If something is non-core, we can probably outsource it to others who have deep product expertise and who can offer aggregation benefits. Who wants to get excited about office supplies? One group procurement director told me he had good people but had taken things as far as he could and wanted a different perspective, as well as better technology and processes.

Alex Milward (AM): Another reason is around flexibility. Just as you can change your insurance broker, so you can change your procurement provider if the market or skills requirement changes.

John Armstrong (JA): I think the outsourcing market is now more mature and able to provide a wider and better service. This could and should include procurement. Just because something has previously avoided being outsourced - and procurement has certainly been in that category - doesn’t mean it should escape forever.

GJ: Are procurement professionals therefore deluding themselves if they believe that what they do is core to their organisations?

JA: Well, core should only be what is totally critical to shareholder profit for that particular organisation. It’s a question of reviewing how best you provide various support functions. Some of those have already been outsourced: IT, catering, fleet, HR, training, accounts payable. What is now happening, and should happen, is that the organisation looks again at its outsourcing strategy in a more mature market. It’s up to procurement itself to demonstrate that it is adding value, and can continue to add value, as an in-house activity. But within the procurement I think there is a strong mentality of not-in-my-backyard. It’s unlikely to recommend initiating the discussion and outsourcing itself, because it’s comfortable in-house. It almost needs to have it imposed by a chief information or chief financial officer.

GJ: Are those typically the people making the decision to outsource procurement?

AMc: In the public sector it’s almost without exception the finance department. They are driven by two things: costs particularly, and by government directives. Are you compliant with the latest market testing or purchasing metrics?

JA: Orbys has just been involved in some work for the Metropolitan Police. The initiative was raised by the Metropolitan Police Authority, so there was a political agenda. One area under review is procurement. It’s about ensuring good value for money for local taxpayers.

GS: Different types of outsourcing will be handled by different people. So if you want a complete organisational revolution, it probably needs to be a chief financial officer or chief executive to drive it. If you are talking about supporting category management or aggregation, it can well be the head of procurement who wants that done.

KA: In an ideal world, it should be a board decision. But when we were managing the global deal for Nortel, that was signed when the telecoms market was absolutely booming. We would have been deluding ourselves if we thought the contract that had been struck was anywhere on the board’s radar at that time. The decision was driven by one finance director who wanted to control his costs. The procurement guy took the view that he didn’t have the time, the resources or the expertise to do it himself, so he drove the outsourcing activity to deliver to his finance boss.

GJ: Surely organisations have the choice to develop their own staff and systems rather than outsourcing, don’t they?

AM: Yes, but some don’t have the critical mass to employ the right people with that calibre of expertise. They can’t afford to have a full-time person looking at a particular area. What you want is a person with deep experience of a category, not someone who spends just a quarter of their time on it.

GJ: Is that why Accenture decided to outsource its own procurement?

AM: About four years, ago we set up a company to manage our spend and then to bring in other companies to aggregate theirs. At that time, we concluded that we weren’t ready to manage a full and global procurement service when we came from a consulting background. It was felt that the management attention and the better aggregation, given that our spend is indirect mostly, would come from outside.

JA: BP has a very professional procurement function. What it doesn’t have is a truly group BP procurement function. BP by its very nature splits itself up into different streams and business units. If each of them makes a profit, they are left alone to get on with it. That doesn’t necessarily allow the economies of scale and the ability to go out and tender to suppliers with a greater demand, to get lower pricing. So what BP is currently doing is undertaking a number of co-ordinated procurement projects to optimise its procurement spend. That’s the name of the game at the moment.

GS: I see it as a continuum. At one end is complete outsourcing. But there are many gradients along the way. You could just take an existing team and augment it. As Keith mentioned, some organisations don’t even have a procurement function, so in effect you are creating one. You can then have category management where people aren’t even on site. Or organisations can choose to do it all themselves. What they’ve got to decide is where they want to position themselves, what’s going to be best for them.

AM: It could be sourcing, it could be contract management, it could be the logistics, the management of the inventory, it could be the actual buying and call-off from the contract, the requisitions, the facilities and administration, or the accounts payable. In my experience, that transactional side is the harder change management issue. It’s only when people use the deals that strategic sourcing has created that you see the benefits on the bottom line.

KA: That was one reason why Nortel decided to outsource. It was having extreme difficulty controlling that spend.

GJ: But you don’t have to outsource to reduce maverick buying. You can do that yourself internally, can’t you?

JA: An internal procurement function will say, “We’ll place this order this time, but don’t do it again!” Having outsourced the activity, the provider can say, “We haven’t received an authorised request, we aren’t paying!” They are doing it because that’s what the client has contracted them for.

GJ: I can see the incentive for the outsourcing provider, but why should people’s behaviour change just because procurement is now handled from outside?

JA: They won’t automatically change their behaviour, but what is being imposed is a discipline. The organisation should be communicating the savings that can be made and the improved margins that result.

AMc: Compliance is a relevant factor, but I’m not sure it’s the right reason for outsourcing. All you are doing is outsourcing a problem - controlling your internal people.

KA: It’s not a reason in its own right, but it is a factor for a number of companies.

JA: It’s a cop-out, but it’s a valid cop-out! You could and should have been able to impose that discipline internally, but the fact is you haven’t.

GJ: So compliance is one issue. What other problems are there around outsourcing? Or, to look at it another way, what are the factors required to make it successful?

PR: One of the worries I’ve had in the past is that outsourcing can be very adversarial - there’s the problem, over to you and see you later! That will never work in my opinion. What you need is transparency about what the agenda is, you need clear management of those key stakeholders and you need ongoing sponsorship. If you haven’t got that framework before you start the contract, the chances are you may well fail.

KA: One of they key factors we found was that while Nortel was very strong in defining the performance measures for us, we found it difficult in the early stages to define the requirements to enable us to deliver. One of the single biggest issues I had was understanding the baseline. That was critical, because it determined the expectations of the client in terms of cost savings and service levels. It took an inordinate amount of time to change their mindset on that.

JA: This is why the outsourcing has got to demonstrate to the client that it’s able to succeed. There has to be some early wins. Putting the time and effort into understanding the detail, getting a grip on the processes, getting compliance does eventually deliver better savings, better structure and so on.

AM: We’ve certainly seen the benefits of having someone else bring in that aggregated market knowledge rather than necessarily aggregated spend, because I don’t personally believe that aggregated spend works in every instance. It’s hard enough to get common requirements within one company, let alone across several.

PR: Yes, it depends on your market sector. There are some where it doesn’t work. I do have aggregation working at the moment to different degrees. But the incremental benefit is still good news. A key prerequisite for me is that the client must take a proactive stance to help the outsourcer understand how its business works. If you can’t integrate rapidly into that culture, systems and processes, your performance will be diluted.

AMc: There’s got to be a good understanding of your customer’s operations. If you haven’t go that right you could really fall foul. We’ve been implementing e-procurement at the same time, so clearly there’s a huge amount of training taking place. You have to make sure you get the basics right, such as continuity of supply. Second, there has to be a very thorough communication with suppliers and internal customers both before and after the changeover.

GS: I’m not so sure that’s true. I think you can outsource your procurement and never tell your suppliers.

AMc: But if you haven’t communicated with your suppliers that somebody called SureStock is now issuing orders for North Cheshire Hospitals, how do you know the goods are going to turn up? It is fairly crucial.

AM: It depends on your model, but if you’re in a large-scale transfer of staff, you need to communicate because they haven’t been involved in the decision-making process. That needs to be done extremely professionally.

KA: We had a similar issue at Nortel. We had to transfer a lot of people across and one of the barriers we had initially was that we left them in their old environment. Nothing had changed for them except for a PricewaterhouseCoopers (PwC) logo on the wall. Doing the change management piece with people who didn’t see the need for it was a real barrier to getting things moving.

AM: Yes, if they’ve worked in the same company for 20 years, they aren’t suddenly going to say, “Now I’m doing a different job!”

PR: I’m horrified to hear you say that you left the people in the same place. We always try to move the people physically into a different environment.

AMc: We’ve had to deal with the same issue. We are still on site and some of the original people are still there. It’s an interesting psychology. We did actually redecorate the offices, put in new desks and PCs, and a new manager. You need the on-site leadership to ensure that change.

KA: We put a PwC guy on-site to try to manage it, but they were a lone voice in the wilderness. It was traumatic. The idea was that the transition was going to be seamless; nobody in the company was going to notice any difference.

GJ: So did you change that situation over time? What did you do?

KA: Yes, we had to. We physically took them off-site and put them in our UK centre of excellence, from where we managed spend for 15 countries. But we had to then communicate with the client to explain that they weren’t going to have the personal service that, say, Jack had provided in the past. It was going to be done remotely.

JA: It’s about getting the customer comfortable. Initially it’s about having no noticeable differences. After that you move people off-site and apply new techniques and approaches. Then you are into transformation, of which the ultimate is offshore sourcing, which may be done by an extremely competent group of people based in India who have never even visited your offices.

AM: I think that’s possible with some of the transactional side, the applications hosting, the accounts payable, but I think we’re a long way off the sourcing of key strategic categories that are critically important to the success of the business moving offshore, because of the need to have the key stakeholders involved in the definition of the requirements and then the decision around who’s going to be supplying it. That will remain onshore, close to the customer.

GJ: Are you therefore saying it’s just the transactional and indirect activity that can be outsourced, or can direct and strategic areas go too?

AM: Going outside can make a big difference on the transactional side, so that’s where you might consider full outsourcing. In terms of actual purchases, I think the indirect will be the first to go. That’s where most of the providers that have sprung up are focused - office supplies, travel, car provision. However, there are others that have a specialism in a particular category that some companies may consider to be direct and core, such as goods for resale. But I think that where it becomes a strategic item, or the company has a strategic influence on the supply market - such as a chemicals company - then that should be maintained in-house.

PR: I’d support that. The spend we are managing is indirect-led but, in the case of one client, includes a core part of its product that is visible to the customer. It’s probably 80:20 indirect to direct.

GS: Indirect doesn’t mean not business critical - for example, electricity. And if you are a marketing-led organisation, you can’t afford to get your marketing contract wrong. We are asked to look at indirect, because much of it is common across businesses and therefore there is an opportunity for economies of scale. I’m not sure any of us are saying that all procurement expertise should be outsourced.

AMc: Actually, we find in the public sector it is the outsourcing of the entire process, from the strategy, right down to the systems, the people, the processes. It doesn’t tend to be commodity based, it’s the whole shooting match.

AM: What about key medical equipment, would they be happy to outsource that?

AMc: Just because they’ve outsourced the procurement service provision doesn’t mean they’ve abdicated all clinical input into the sourcing decision, that’s absolutely crucial still.

JA: The danger is that the outsourcing vendor is doing all the management and has its own set of priorities. The client wants to be sure the service is fit for purpose and that it is getting the benefits the original contract was signed to deliver. That requires someone in-house who ideally has been involved in the whole process of vendor selection and contract negotiation and is well aware of the spirit behind it, and who then manages the vendor relationships using their own balanced scorecard to determine whether the outsourcing vendor is delivering the agreed service at the agreed price.

AMc: In our case that tends to be the trust’s finance department. One of the key things they do is look at the savings we’ve delivered, because we guarantee a certain level.

GJ: Not many companies seem to have outsourced all of their procurement. Indeed, some of the early adopters have taken it back in-house. Does this suggest that outsourcing is not working?

AMc: I wouldn’t say that. Where we’ve seen things in-sourced in the NHS it’s because it’s been successful.

AM: I think there will definitely be failures. But there are also sufficient successes to be able to say that it can be done. At Thames Water, part of the sourcing has gone back in-house. One of the reasons is that it feels like the transformation is complete; the team is a smaller, higher performing group. For them, the next advantage is to remove the Accenture margin. Having that option is quite attractive for a lot of companies.

GS: The business case starts changing from making incremental savings year-on-year to protecting and preserving those savings. That’s a different story and it’s a harder story to tell.

PR: We need to be realistic and say there are very few outsourcing projects that have got consistent, proven results over a significant period of time. But things are maturing. Procurement directors should certainly embrace this, it should be a part of their toolkit.

GJ: In your experience, have those companies that have outsourced procurement thought through the reasons carefully? Do they know what they want to achieve?

AMc: In the NHS, we’ve seen some very well thought-through reasons in terms of pound note savings. But it’s how you measure that is not thought that through sufficiently. Organisations often don’t have the depth of knowledge of the internal procurement function to be able to say whether they are getting a good service.

GS: Many organisations haven’t built up an internal procurement capability, so senior management’s awareness of what procurement could look like, or should be doing, is not very sophisticated. Then you are trying to outsource it, so there are blockages. There is a lot of educating to do.

AM: I think you’re being a little disingenuous, I think people do understand what they want from procurement. One of the reasons it has taken a while to outsource it is that a good procurement function should be networked into the entire organisation. Therefore to extract it, and to replicate it from the outside, is very difficult.

GS: But what I see in most businesses is that the procurement function isn’t across all areas. It only has a limited role in the organisation, which implies that management is not fully aware of what procurement can do.

PR: Outsourcing has to be a strategic decision. Forget the cost, it’s a change management agenda on a grand scale, no matter what the size of the organisation. If it’s viewed as a tactical, short-term win, it’s a complete recipe for disaster. For us as providers, we must make sure we are incredibly responsible and we don’t engage with a tactical fix.

GJ: Is the message to companies that are thinking of outsourcing not to go for the evolutionary approach, but to do something more radical straight away?

JA: A gradual approach is still the right way if it continues to make people comfortable and if the organisation can afford the timescale to do that. However, every opportunity should be taken to fast-track the whole outsourcing process, to ensure the benefits are delivered as soon as possible.

AMc: I’ve seen no research to say one way is better. It might well be that both ways are entirely appropriate for different industries and different companies.

PR: Many of the companies I’ve had contact with are increasingly looking at a radical business agenda. They need to make step changes and to do it quicker than in the past.

AM: When asked what they would do to really transform their organisation, a lot of my clients openly say they would like to weed out half of their procurement staff and bring in new people with different skillsets.

GJ: Should in-house procurement professionals feel threatened by outsourcing then?

GS: No. There are often internal blockages that prevent procurement staff from achieving their potential. If you go from being part of a team of three or four to maybe 50 or 60, it’s a fantastic opportunity. You end up with more personnel and more resources than before, so you are going to have a more visible procurement function with higher skills. The issue is therefore not about losing jobs, but about upskilling, being more dynamic and energetic and making a greater impact.

AMc: I would agree with that. We invest heavily in staff development and training, qualifications such as CIPS, HNDs and MScs, plus new tools and systems. Almost without exception, people are better paid because they are better skilled. But I think it’s wrong to expect that everyone should become superstars. A team needs to have a mixture of superstars and good solid people.

KA: The only people who didn’t make the transition successfully from Nortel were those who couldn’t embrace change. But that was a minority. Most people wanted to take advantage of the opportunities available.

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