Connecting the dots:
Transforming procurement to gain business value with BPO Jim DeLeo
Abstract While many firms have embarked on procurement system improvement journeys, most still utilize BPO services for specific tasks rather than a holistic structure, inhibiting their ability to capitalize on value created by a connected service. When procurement is viewed as a contiguous spectrum, the opportunity to unlock value emerges quickly. Perhaps more than any other ‘back office’ function, procurement operates best as a connected stream, where one task feeds the next, and inputs are rationalized to prevent blockages and friction downstream. Transformation efforts ought to focus on repairing and connecting gaps. The return on investment is well worth the endeavor.
Friction The situation is all too familiar. Mike gets a call from Suzanne. “I need a quick RFI; doesn’t the Bangalore team do that?” “Yeah sure,” Mike replies, adding, “What’s the trouble?” “Well, I went to the initial training, but it’s been a while since then, and I don’t remember the engagement process,” she says, adding, “Shouldn’t it be easier to get work assigned and to track where we are with it?” Mike smiles knowingly. “It’s a common problem,” he declares, “there are too many entry points into the process, and whenever someone new is added to the mix, it becomes very confusing and takes a long time to smoothen out. Rest assured; we are working on it.” Suzanne has another issue. “Also, it seems that the item master for the suppliers in this category does not match any of the supplier contracts,” she continues. “That’s been the case ever since we created a strategic sourcing group Suzanne,” replies Mike, “we are engaging one of our partners to transform our spend analytics and connect it better to the compliance process this year.” At such an early stage of this fictitious BPO engagement, that is the best promise Mike can make. In most cases, the process of smoothing the way in which on and offshore teams interact is long and convoluted; but it needn’t be.
Introduction The story of Procurement BPO began long ago, initially foraying into tactical support services that could be off-loaded from sourcing professionals in order to utillize time available for more strategic and high business impact work. This story is still being written and edited. In recent times, more advanced firms have further explored procurement outsourced services, whether off or near-shore, adding additional source to settle tasks. In some cases companies have engaged a service provider to run entire categories of spend from opportunity analysis to implementation. Wherever a company may be on this procurement journey, it has become very clear to procurement service providers that transformational consulting is an essential ingredient in the overall BPO mix. A transformational view is important during the initial transition phases. Procurement transformation consulting can be considered as the ‘glue’ that binds isolated procurement work streams together, providing entry into high performance practices, procedural alignment, and facilitating change from outdated process to high business impact value streams. (Fig 1) Going further, imagine engaging a transformational effort BEFORE kicking off a procurement outsourcing initiative. A full-scale ‘diagnostic’ could provide a comprehensive view of the current system, which would highlight areas of particular strength, areas to be developed, and business case analysis to determine the true ROI available by improving targeted areas. If, for example, spend analytics are particularly manual and challenging, a short-term low investment transformation project could rectify the gap, empower the outsourced service to provide more and better information at lower cost in the shortest possible time. Similarly, an unmanaged tail spend could be aligned under a catalog management transformation so that an outsourced procurement operations team could add business value (vs. just transactional value) by bringing more spend under management. Thinking in this way, altering a procurement system to achieve higher business value, scarce investment resources are prioritized to generate the highest possible returns. Like humans, no
two procurement systems are identical. Transformational consulting allows gaps to be strengthened and connects the dots to ensure the contemplated services achieve the intended outcome. This point of view will affirm that transformational consulting and procurement BPO go hand in hand, the one influencing the effectiveness of the other. Additionally, we assert that to a greater extent than other back office business services, procurement processes are innately linked; working diligently to improve and align the farthest upstream processes will pay big dividends downstream.
Understanding transformation vs. process improvementTransformation is a major change to an operating system to significantly advance system capability and impact
BPO mobilization Typical project start, but possible to run in parallel with transformation
Platform solutions (Technology transformation)
Sourcing support (MI, SA, OA) RFx, Auction, should be Negotiation support Contract compliance management P2P service SRM admin
Supplier enablement Reporting
Procurement silos Many of the outsourced services within the Procurement BPO practice arose not as a direct result of an overarching supply chain vision, but as ‘opportunities’ to remove administrative work from over-tasked procurement team members. Work streams such as contract administration and RFx preparation are such examples. As a result, many companies now possess outsourced capability in discreet packets, but few have connected all of the potential streams in the procurement spectrum. They have ordered a la carte, rather than combining all elements of the meal. Of course, it is easier to bite off chunks of work than to try to take on the entire procurement system all at once. Though the transition is smoother, the unintentional consequences can affect overall satisfaction with the result. For example, if contract routing is the only piece of contract administration that is outsourced; where abstraction, escalation, replacement clause, and uploads are retained, the outsourcing provider will inevitably be forced to reach the client organization at multiple points, increasing complexity and time. In contrast, if contract administration is outsourced as a contiguous process, the provider can operate with fewer touchpoints, increased speed, and better accuracy. Going further, if contract administration is performed in conjunction with supplier on-boarding, the outsourcing provider can be made responsible to ensure contract terms are aligned and loaded into the system in a standardized fashion.
Transforming the silos Connecting siloed work streams can unleash procurement effectiveness. When viewed through a transformative lens, connections in previously isolated work streams become clearer, and the entire sequential flow of the procurement system is exposed. Direct business value is not achieved by individual procurement nodes, but is a collective end result driven by a connected system. When a transformational specialist examines a procurement system, s/he begins at the headwaters of the river; spend analysis. Everything else flows from spend data. This information is used to profile the category, inform the strategic sourcing process, generate purchasing direction, and prioritize supplier relationship management efforts. In today’s environment, many firms have embarked on spend transformation projects, most with an eye towards automating what has previously been a highly specialized and manual effort. While there are numerous technology platforms that possess the ability to segment and spend data, they require rational data inputs. The most difficult yet rewarding dimension of spend analysis today is master data cleansing. This is the process of rooting out corrupt, aged, and inconsistent spend ‘packet’ data including UNSPC coded items, and potentially unique company identifiers. Details are important. A clean item master feeds not only strategic sourcing, but also contract administration (by ensuring what is purchased is correct with the correct price), catalog management (by ensuring the catalog contains no duplicates or ‘bad’ item codes) and supplier relationship management (by accurately reflecting true demand). When fully sorted, the clean information can be fed into a spend analytics tool
and it will display a far more accurate picture of the various spend categories. Without this degree of accuracy, the job of a sourcing specialist is exponentially more difficult. Stakeholders may not believe the picture portrayed with aged data, and may be unwilling to devote collaborative effort in areas that could truly benefit the organization. Suppliers may claim the data of consumption is not corroborated by their sales data, and be unwilling to trim cost and invest in joint process improvement efforts. Once transformed, accurate spend data become the ally of the sourcing specialist, and it makes sourcing support activity such as supply base analysis and segregation faster, positively affecting the procurement continuum by shortening sourcing cycle time. Procurement executives can deploy resources for more effective use across the continuum, and generate greater business relevance. Accurate spend analytics can also be leveraged to inform another area of procurement transformation focus, organizational design and policy. Still today, many large companies have procurement groups that had been developed in response to changes driven by growth rather than a conscious design informed by procurement strategy. Benchmarks such as spend under management, negotiated savings, cost per transaction, and ease of use which would normally drive strategic choices, were not available during stages of explosive growth. Accurate spend analysis will inform decisions affecting deployment of scarce resources. If spend analysis reveals that
buying channel proliferation is an obstacle in performance, senior leaders may choose to emphasize category management skills in the organizational design. On the other hand, if the analysis shows that pricing within certain supply bases is inconsistent or higher than market, the leaders may decide to bring in sourcing experts with strong negotiation backgrounds. Transformational consultants with strong industry backgrounds can be engaged to help structure these discussions, leverage the data, conduct organizational change readiness scans, and architect procurement organization and policy that supports the overall vision of the Board and CEO.
change management techniques, tools, and communications… for the brunt of the change program need to be designed by them.
Best-in-class organizations work to align spend analytics to strategic sourcing, and then further extend into eSourcing tools. Linking these functions result in better standardization, faster project completion, and earlier benefit realization.
Transformation work ties service towers into an effective system
When the spend data informs a coherent and pro-actively designed procurement organization structure, downstream procurement operations are more easily aligned to achieve harmony. Here again, transformational consulting can assist with the alignment, whether manual processes need to be automated (such as requisition generation and approval to purchase order creation), or multiple automated processes need to be harmonized. In many cases, due to economic growth described above, firms have adopted multiple automation platforms designed to accomplish the same thing, and they eventually come into conflict with a unified ERP back office. This results in time consuming and complex workarounds which can only be operated by the people who created them. Overall system generated friction dilutes the impact of procurement, increases cost, and in some cases prevent critical commerce from occurring as it should. Supplier relationship management, a silo that is gaining emphasis among CPOs, is the final tie in the overall procurement system. It uses information produced by all the other silos in sequence; spend data informs supplier scorecards, sourcing information supports supplier tiering, operations, and transaction information supports supplier development. CPOs with the sharpest vision today are anxious to reform the SRM groups and connect them to the rest of the procurement system. Transformational consultants are keen to design programs that harmonize and unify disparate systems. Inputs to business requirements are organized and controlled, scope is established and governed actively, the end objective is settled, and the project management is positioned to deliver early and under budget. (Figure 2) Among the good candidates within procurement operations for transformational improvement are contract administration, strategic sourcing support, requisition to fulfillment tactics, and supplier relationship management. Strategic sourcing support feeds contract administration, from which guidance comes for requisition to fulfillment, and compliance to contract can be driven by sound supplier relationship management. Traditionally their development has been ad hoc, but connecting them can truly supercharge procurement performance. Finally, practitioners imbued with change management experience are crucial to the success of any procurement transformation. Much has been written about the role of change management in systems integration, other technology initiatives, and business process outsourcing. The hazard of plowing ahead with initiatives without adequately positioning the organization for the change is very real, yet it is the element most often diluted when cost control measures are introduced. A shift in mindset is required in our industry to combat the losses incurred when change management becomes an afterthought. Transformational consultants need not only have experience as practitioners in industry, but they must also be trained in the latest
The good news is, most practitioner-consultants have experienced real world organization change, suffered the consequences of inadequate preparation, and learned what to do to mitigate the costs incurred when clients do not invest adequately in that facet of the transformation. The final responsibility, however, rests with the client to ensure the right people and right program are in place to give the project the greatest possible impulse toward success.
-Spend analysis projects
-Rapid sourcing -Strategic sourcing -Platform harmonization
Data cleansing Spend segmentation
Contracting Administration Operations
-Tail spend management -Catalog management
Supplier enablement Figure 2
Benefits of transformational connection Case study Consider the case of a major mining company. Like many others, this organization constructed elements of procurement wherever required. But in 2009 they contemplated a new journey, linking the procurement service towers and, as much as possible, running the system in a more coordinated fashion. Decision makers expanded the range of service provided by Infosys, and then joined processes together to be run by the same governance team. Spend analytics were coordinated to inform sourcing opportunities, which were aligned to better use RFx capability, take advantage of market analysis, and utilize reverse auctions. From sourcing support, the company then began utilizing Infosys to run end-to-end sourcing projects autonomously. Since Infosys already managed PO processing, expediting and price file maintenance, contract negotiation and administration was a logical next step, allowing closed loop compliance. The final piece of the system was connecting supplier monitoring and invoice level audit. In this manner, the company was able to unlock much greater value across the spectrum. For starters, it resulted in 6% hard dollar savings across the board. Later on, savings from contract compliance and audits were achieved, along with a 75% improvement in the use of reverse auctions. The client enjoyed a 30% increase in retained category management effectiveness, and gained a global footprint. There are systems that can assist. Once a process is transformed and optimized, or an entire system is optimized and linked, technology such as Infosys ProcureEdgeTM can be overlaid to automate as much as possible.
Return on investment Holistic transformation, the type that affects change across the source-to-settle spectrum, is worth a great deal to organizations that undertake it seriously. Return on dollar spend has been as high as 28% –31% in some less mature procurement systems. Here again, the key to achievement is the mindset shift that every procurement service is connected, each flows from the former, until the system terminates in accounts payable. Cost is driven from the system in many ways. Increased speed of transaction through well-fit process connections, increased usage of the system due to ease of interface, less need for ‘work arounds’, better connection to other back office operating functions, and of course, savings realized versus simply negotiated by better adherence to existing supply contracts. One simple way to begin capitalizing on ROI is to build a simplified engagement model. In most procurement departments today, the injection of need and demand happens at multiple touch points, often in an ad hoc fashion, with many gate-keepers. If you don’t know the informal process, you must find someone who does, to avoid wasting valuable time and creating unnecessary friction. In keeping with process connection, it is wise to create a single point of entry engagement model, where demand is governed by a specific process steward, funneled through a set of standard criteria, prioritized, and communicated to all appropriate parties. Here again, a service provider can provide automated workflow which greatly simplifies demand management.
Of every action you take as a procurement leader, ask this simple question: does it cause friction in the business or does it create flow? Friction is anything that makes it more difficult for people in critical roles to win with the customer. Flow, on the other hand, is doing everything possible to remove barriers and promote better performance. The question applies to any company in any business and it will take you farther down the road faster than the hazy, abstract injunction to become a strategic partner. Even in what appears to be routine procurement responsibilities, you can inject the business perspective simply by asking whether what you are doing is going to enhance the flow of the business or impede it with friction. For reasons including failing to focus on the most critical changes or clearly articulating the vision up front – as well as focusing too much on sourcing rather than on associated procurement functions such as contract and performance management – less than half of the organizations looking to ‘transform’ their procurement functions have been successful or very successful. If you invest the time and attention to detail, connecting the dots in the procurement system will pay big dividends in the long run in your pursuit of procurement relevance and sustainability.
Principal Consultant Infosys Business Transformation Services Jim is a 25 year supply chain veteran, both in industry and consulting. Currently conducting procurement transformation work for Infosys, Jim was previously at Accenture as a senior manager in supply chain, and StrategicSource as the director of sourcing operations. Jim has worked extensively with off-shore and near-shore teams in the procurement discipline, and across various industries including manufacturing, energy, retail, and automotive. Some of Jim’s signature work includes building an organization that saved $250 million in indirect spend for a major retailer, creating a roadmap for an SAP center of excellence at a large utility, and building a supply chain division for a $2 billion industrial engineering and construction firm. Jim’s educational credits include a BA cum laude in Government from Harvard, and a MPA from Troy State. Prior to his career in private enterprise, Jim served as an F-15 fighter pilot in the USAF, and is a combat veteran of Operation Desert Storm. Jim resides in the Minneapolis-St Paul region of Minnesota.