I was recently engaged in an excellent conversation witn Gianni Giacommelli, who leads marketing strategy for SAP’s BPO division, on the way forward for the Procurement BPO market. One of the aspects about SAP that has impressed me, is their strong view of BPO as a opportunity, as opposed to a threat, to their business. Gianni’s boss, Christain Baader, has performed an excellent job driving this strategy in recent years, and made his case-in-point last year where he discussed why technology is an important key to BPO-sustainaility. BPO is all about driving common strandards that can help service providers leverage their service staff and technology applications across multiple clients in a utility model. So what better opportunity is there to encourage enterprises to standardize on a common ERP archtecture than when they evaluate BPO opportunities for their business? And it’s not solely about BPO, it’s also about globalization: the more global enterprises can encourage their country-level businesses to operate within a global process template for functions such as finance, HR, sales and procurement, the quicker they can access critical data to make global business decisions. Without digressing further, I asked Gianni to summarize our conversation regarding the development of procurement BPO solutions, where many of the leverage points for cost savings are driven through process and platform optimization, and not solely labor arbitrage. Over to you Gianni:
Procurement outsourcing burst onto the business process outsourcing scene with great promise, but it has changed of face in the last two years. While early deals delivered tactical benefits such as procurement operations cost savings, many companies are still not realizing the more substantial advantages that can be gained. In early procurement outsourcing deals, service providers did not consistently manage to deliver more substantial spend-related savings. With the cooperation of clients, they need to complete designing and deploy integrated, end-to-end, sourcing-to-settlement procurement processes – and be allowed to contribute experience and best practices. At the very least, the provider should be able to bring in an infrastructure (i.e. a pre-configured best practices platform, ideally with some procurement-specific services on top e.g. level-1 support and supplier onboarding) that would allow the client to focus on executing seamlessly. Technology utilization has a key role here and, while theoretically understood, is often a contentious ground – and in our experience requires more than a “business as usual” treatment.
Realizing the Full Value of Procurement Outsourcing
Basics first – and a home truth: procurement outsourcing success requires the CPO, COO and CFO to do their part – collegially. The only way theoretical savings negotiated at the sourcing level (which is where often CPOs incentives are confined) can be turned into actual savings is 1) ensuring compliance within the client company and 2) ensuring the results can loop back into strategic sourcing where the observation of the actual company behavior (what is bought, when, where, in what sizes) can provide additional levers to the category managers. Most of the remaining savings come from controlling one-off purchasing and vendor payments and from cost avoidance as a result of demand management and reduced costs of enterprise procurement activities (this is where the CFO and COO typically have a say).
While companies can realize procurement outsourcing value by leveraging the provider’s economies of scale and labor arbitrage, process optimization (defined as processes and knowledge including securing category-specific knowledge and related usage) is the single most important lever. To maximize the impact of this lever a unified technology platform must support and consolidate sourcing and purchasing processes. A key aspect in securing procurement savings, compliance is ensured in the purchasing and ordering process. This can be accomplished by leveraging the use of procurement cards, approval and other workflows, as well as data analysis and reporting based on standard procurement reports within the business intelligence component. Strategic sourcing savings are obtained by enforcing stronger compliance, as the customer converts results from sourcing events into contracts and catalog items from which requisitioners can choose. Poor performance in activities such as one-off purchasing and problems like high costs of demand management and enterprise procurement activities (such as the cost of the procurement organization) can be addressed with internally hosted catalogs that contain only approved purchasing items (both goods and services) and respective vendor contracts.
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Four years of experience in procurement outsourcing, two simple views
1) Providers that are striving to deliver optimum procurement outsourcing solutions typically offer processes based on best industry practices and – in order to achieve that – have realized the importance of strong relationships with the software suppliers underlying their offerings to ensure effective design and execution of service delivery. BPO-specific implementations are different from typical system-integration jobs (due to the search for replicability leading to heavier templatization and multi-client architectural choices). For this reason such collaboration must go beyond a simple joint go-to-market effort, and must encompass service delivery design – so that the solutions are deployed in a way that they address the business problem and they are cheaper to implement and run. As an example, SAP has signed such partnership agreements with Accenture, Hubwoo, IBM, Infosys and Quadrem and spends a significant amount of resources in those activities.
2) Customers that have achieved long-term benefits from procurement outsourcing are shown to be consistently open to using their providers’ standard processes and platforms. By doing so, providers can achieve the economic model they need to deliver innovation. Again as an example SAP has a few dozen customers operating on the basis of the BPO program and we continuously collect learnings from such experiences. The learnings are exceedingly interesting, and the sad truth is that – in the absence of such program – those experiences would be lost between (and within) BPO provider and software vendor.