The Unkept Promise
On average, procurement groups actively control a third to two-thirds of total company spending, according to the Aberdeen Group, with most choosing to focus on managing strategic, mission-critical expenditure categories related directly to the company's product or service.
Under pressure to deliver greater cost savings, companies have more recently sought to place non-mission-critical spending under formal contract and management. They're recognizing that while these categories may only amount to 25 to 35 percent of overall expenditures, they can yield substantial savings through centralized procurement and leveraged buying.
These noncore areas often include mail and courier, temporary services, supplies and printed materials, facilities, and marketing and advertising, as well as plant-level maintenance, repair, and operations categories. Indirect and MRO expenditures have historically been highly fragmented categories due to purchasing decisions being made at the local or plant level. These categories also present especially difficult adoption challenges because of their use across widely disparate buyers and organizations.
Until recently, companies attacked these non-mission-critical categories in one of two ways: 1) assigned them to their own, overburdened procurement group, or 2) engaged outside consultants to strategically source new agreements. In either case, the savings anticipated from these new agreements often failed to materialize. Why? Obviously, companies cannot assume sourcing alone will create savings.
Low Usage of National Agreements
Expenditure analysis data points to low usage of national agreements by internal buyers, especially for indirect expenditures. The average adoption rate is below 35 percent for most categories and below 20 percent of total spend. This is usually because the organization failed to properly implement and manage strategically sourced agreements or execute communications and other change management initiatives necessary to ensure buyers use contracted suppliers.
Low compliance with national contracts diminishes the promise of savings. If a new, strategically sourced contract promises 10 percent savings amounting to $1 million, 20 percent compliance on that contract diminishes the impact of those potential savings to just $200,000, the equivalent of 2 percent savings. Low returns like this fail to impact the bottom line, share prices, or even cover the cost of an outside sourcing initiative.
Rolling out new agreements for non-mission-critical categories is a complex undertaking. Done properly, deployment activities transition users from incumbent to new suppliers while limiting disruption to ongoing operations and continue - usually for 30 to 60 days - until initial contractual obligations have been met.
Once deployed, agreements must still be managed to fully realize and sustain savings. Compliance management activities include measuring category spend against preferred contracts to identify and resolve off-contract purchasing and monitoring suppliers to ensure pricing, service level, and continuous improvement commitments are met.
Most procurement organizations are skilled at sourcing and negotiating new and better agreements. Sourcing is their passion. Management of agreements is not. Even for professionals who possess strategic sourcing and agreement management skills, the pressures to create new agreements typically leave little time for managing the rollout and subsequent issues with existing contracts.
And even if operations people are on board with the new agreement, they have many other core business priorities. Overworked procurement groups sometimes devote their energy to urging compliance within the largest office, business unit, or plant. After all, it would seem that if the biggest business unit buys from the preferred supplier, at least some benefits will be realized. But this strategy often fails because when one unit does not use the contract, pretty soon other units follow suit.
Compounding the challenges, business units often feel their input is not fully incorporated into the process of developing new agreements. This limits their buy-in to the new agreement.
Anything short of an organization-wide buy-in for the new agreement is doomed to erode compliance. If agreements are not managed continuously, purchases go elsewhere and savings are lost. The supplier does not get the promised volume to warrant negotiated discounts and the quality of service to the company slips. Hostility rises, the supplier is disparaged, issues lag and go unresolved, and another time-consuming savings initiative fails.
An Alternative
A promising new solution is emerging: outsourcing non-mission- critical categories of spend to a third party to strategically source new agreements, and more importantly, roll out agreements across the organization, continually measuring and managing internal adoption and supplier performance.
Strategic sourcing remains the critical first step, but contract deployment and compliance management are emerging as equally crucial disciplines in a comprehensive procurement outsourcing approach to realizing and sustaining savings on indirect categories.
A new breed of procurement outsourcing providers integrate strategic sourcing, contract deployment, and compliance management activities to deliver desired savings and benefits, and rapid return on investment for customers, usually within 12 months. Toward that end, these providers employ all the necessary technologies critical for securing savings and process efficiencies.
Another added benefit is a formal procurement governance structure. Often lacking at most companies, this structure is established enabling the customer to approve sourcing priorities and strategies, to sign off on contracts, and to drive initiatives to accomplish company goals. This holistic approach delivers additional resources and best practices to quickly increase spend under management without the company having to add headcount or invest in expensive and time-consuming technology solutions. The governance structure and sourcing teams - comprising provider professionals as well as representatives from relevant company business units - help ensure crucial buy-in for new contracts leading to sustained savings and improvements in procurement processes.
Delivering Savings
Proper contract deployment and compliance management for indirect categories include a series of labor-intensive tasks to deliver the savings promised by strategically sourced agreements. Without diligence in rolling out contracts across the organization and continuous monitoring of both internal adoption and supplier performance, agreements ultimately fail to deliver savings.
Contract deployment activities include navigating the legal hurdles involved in creating a new agreement, communicating the award decision to winning and losing suppliers, promoting the benefits of new agreements to internal buyers, and loading new contracts into a centralized contract management database.
Other deployment tasks include setting up end-user and supplier order-to-payment procedures and internal processes. Ensuring proper controls up front eliminates costly errors later. End users and suppliers receive training on new systems, and key performance indicators are watched closely during initial stages of the transition so issues can be resolved early.
Services contracts that span multisite operations can be particularly complex. For instance, on a waste management contract, there can be unique contract addendums to fit the needs of each plant or location.
By the time sourcing is done, implementation plans must be in hand to examine parameters for transitions from the incumbent to new service providers. Sites must be surveyed to craft implementation plans. How many trash bins? Where are they located? How often are they serviced? What's the removal frequency?
When to stop the old and start the new service? How do you keep the old service provider motivated during the transition? How do you explain the net overall value to the corporation for any locations that may in fact see their service fees increase? When the incumbent supplier's last shift ends, the new service must begin without the company being double billed. Proper transition requires constant communication and diplomacy, respectful treatment of the outgoing incumbent, as well as the oncoming new service.
And, especially during transition, there are always problems to be resolved, ranging from changes in frequency of services to communicating the proper process for resolving service issues. Who does the plant or office manager call first? If the problem isn't resolved, what happens next? It's a time-consuming process requiring preparation for all contingencies.
For ongoing compliance management, transactions must be continuously analyzed to measure and monitor on- and off-contract spending for products and services. Invoices must be audited to ensure the company is getting what it pays for and the billing and taxes are accurate. With multiple sites, this can mean multiple invoices and varying procedures and chains of command.
All the while, procurement departments face constant pressure to source and negotiate new agreements for strategic commodities. Without sufficient resources, the pressure builds and contract deployment and compliance management activities for non-mission-critical categories are often pushed to the side, truncated, or poorly implemented.
Strategic Sourcing vs. Agreement Management
Procurement departments often prefer crafting new deals and relationships over the meticulous detail management of agreements already in place. If the sheer weight of work was not enough, strategic sourcing and agreement management responsibilities require different skill sets.
Strategic sourcing is creative. Applying deep knowledge of expenditure categories and supplier economics, sourcing professionals rethink supplier relationships, recast specifications and requirements for products and services, employ sophisticated market analysis techniques, develop unique sourcing strategies, and negotiate aggressively for optimum value.
Agreement management is methodical and task-oriented. Applying project and change management skills, agreement managers develop measurements and performance indicators, perform ongoing analysis of spending and supplier performance, compile and communicate meaningful reports to decision makers, and manage problem resolution to realize and sustain savings and drive continuous process improvements.
Also, most procurement organizations lack the management oversight required to implement non-mission-critical commodities across geographically dispersed, independent business units and locations. An outside service provider skilled in developing and executing implementation plans for these types of commodities is often more ideally suited to manage change initiatives. Employing an outsourcing provider typically coincides with the backing of corporate sponsors, creating a higher level of commitment and an emphasis on governance to guide sourcing, deployment, and compliance initiatives toward company goals.
Resource Flexibility
Procurement organizations do not have the same flexibility as external providers to address the fluctuating demands for strategic sourcing initiatives and ongoing agreement management. Outsourcing providers bring in professionals as needed, leveling off resources as new agreements are completed. Likewise, they can deploy agreement management professionals as contracts are completed and need to be deployed and managed.
Flexibility in marshalling resources leads to better agreements done more quickly, increased internal compliance, and better supplier performance. The outcome is quantifiable results and savings that pay for provider services and boost shareholder value.
Resource flexibility also applies to technology support. Many of the cost savings initiatives surrounding indirect spend categories have been enabled by an array of Web-based procurement technologies, including applications for spend analysis, e-sourcing, e-procurement, and contract management. These technologies do not come without corresponding complexities or costs. Procurement outsourcing providers bring proven experience and efficiencies in managing these technologies.
Companies that have deployed e-procurement systems to streamline order-to-payment processes have discovered these initiatives create a huge need for additional resources. Sourcing is needed to develop best-value content for the ordering platform. Content deployment and supplier enablement are required to enable e-commerce. Outsourcing providers bring the necessary resources and experience with integrating and delivering e-procurement platforms as well as complementary applications.
Change Management
In addition to strategic sourcing, contract deployment, and compliance management disciplines, procurement outsourcers bring the necessary change management expertise required to succeed in these categories of expenditures. These techniques are typically embedded within the outsourcing relationship management structure that govern how work is performed between the two organizations, including:
- Collaboration at every step of the process, chiefly in the form of cross-functional sourcing and agreement management teams, to drive adoption of contracts;
- A formal management oversight process to prioritize projects, approve strategies and recommendations, resolve compliance and supplier issues; and
- A governance body for managing the overall relationship that provides flexibility for dealing with unforeseen issues, because it is impossible to predict every need.
Centralized sourcing initiatives for commodities that are used across large enterprises require bringing relevant users into the process up front to ensure buy-in later on, building a base of support. Sharing data and decision making starts the process of changing beliefs and behaviors in the field.
Involving users on request for proposals (RFPs) helps build the decision criteria matrix, including services, delivery, and quality. Questions from operations as well as purchasing staff, get raised and addressed during RFP review sessions and preferred suppliers go forward to negotiations based on responses and user input. Ultimately, those users having to change a supplier at least know they had a say in the decision process.
Freedom Brings Focus
Procurement outsourcing providers bring a flexible pool of resources with specific sourcing, deployment, and compliance skills to ensure agreements are reached, rolled out, and managed properly.
Procurement organizations are freed to focus on mission-critical categories with the assistance of the procurement outsourcing provider's sourcing professionals focused on non-mission-critical categories. Working as a team, they can develop product or service requirements and analyze the market, leading to optimal sourcing strategies to deliver best-value, not just best-price agreements.
And with proper contract deployment and continuous compliance management, company and outsourcing partner work to deliver on the promise of savings - the ultimate total spend under management strategy.
