Outsourcing Your Procurement Process Impacts Profitability
An enormous impact on a company’s profitability comes from its procurement or purchasing process. Some companies are starting to recognize the impact, but most — particularly midsize or small companies — still treat this important process as though it’s unimportant. But, like the fairytale Cinderella, someone needs to do the onerous chores around the castle. Few companies devote enough or state-of-the-art resources to their procurement processes, and the people in this department usually are neither paid the best nor expected to be the best. In fact, most companies don’t even have a good handle on how they are spending their money, let alone how they can change the process to impact profitability. Particularly in lean times when an economy is slowing, executives must pay more attention to the possibility of saving millions of dollars in this area.
Outsourcing this business function can have the same effect of the fairy godmother, who basically reengineered Cinderella into someone highly desired by the prince at the ball. Her potential was there all along, of course, but it sometimes takes expertise and magic wands or other resources to capitalize on the possibilities. That magic-wand treatment is the benefit enjoyed by organizations that outsource their spending processes to Source One Management Services. Aaron Rubin, partner at Source One, points out that no company is “doing as well as possible. And when we can save many of them millions and millions of dollars, it means that a lot of them are not doing well at all.” His company has saved money for every one of its 200+ clients, and “there is still room to go up from here.”
Source One applies its expertise in how companies work with suppliers and in how to negotiate and manage spending. It’s even more important for midsize and small companies, Rubin says, because there “you sometimes have a president or owner doing the buying of some things and doing the buying based on relationships as opposed to objective factors.” An outsourcer has a natural expertise advantage. As Rubin explains, “even if you are not the sharpest knife in the drawer, if you negotiate 2000 deals or 200 deals in a certain category, you have a certain advantage over someone doing it for the first, second or third time.” He sees the current trends and changes in the marketplace and believes the Internet and technology offer huge opportunities that are currently nowhere near being realized at the level that is possible.
Stepping Out of the Comfort Zone
So why aren’t more companies outsourcing this very important, non-core process? The biggest obstacle, according to Rubin, is human nature. All change is very difficult, and outsourcing the procurement process basically asks people to fundamentally change the way they do business. It’s the pressure for profitability that will drive more organizations to outsource their spending, especially as they actually begin to see measurable hard dollar savings.
Source One’s approach is either to help a company with certain components of its spending (such as research, negotiation, benchmarking, monitoring of savings), or to take over all components of the process. Even when only one or two components are outsourced, Rubin says it still requires significant change management efforts within the corporation. It requires sponsorship from someone at the CEO or CFO level (someone who is prepared to deal with the resistance that will be manifested by the staff), and it requires conversations with the purchasing staff and with end users. They need assurance that the outsourcer is there to help the company and not to steal their jobs.
“We explain to them that the opportunity is for the organization to devote its people to things that are really its expertise. If the corporation manufactures widgets, you want people who are going to be skilled in marketing those widgets and developing new widget offerings and figuring out the best way to manufacture those widgets. But even with all that — with a perfectly logical explanation — there is resistance,” he claims. “If nothing else, there is just the resistance of doing things differently than they have done before.”
Does Procurement Need to be “e” Nowadays?
Source One’s answer is that the procurement process falls along a spectrum according to the type of products or services being purchased. “At the simplest end — which does not require a lot of technology — are things like contracts that you put in place but you don’t make an order each time you use the service, blanket orders each month, or automatic replenishment of inventory,” says Rubin. Telecommunications is an example; there is an initial contract but no purchase order is required for a dial tone. A company needs to be able to control its spending in this area by learning how to negotiate the best contract and then how to manage it.
At the most complex end of the spectrum are items ordered one time, as well as custom buys. A recent headline example is a company in California that needs to buy 100 tons of coal in order to use its generator when the electrical power disappears. It isn’t buying coal on a regular basis. Rubin explains the methodology here: “There is not a lot of technology involved, but it requires people who specialize in helping companies negotiate a deal quickly and in expediting fulfillment of needs.”
In the middle of the spectrum is where eProcurement has real value, and Rubin says that eProcurement should be the tool that handles 80 percent of the spending in this area. This type of spending is for items that are catalogable and require some sort of contract negotiation. The benefits of logging onto the Internet and placing an order for this type of purchase — eliminating paperwork and people, increasing speed and accuracy — are obvious.
Source One advises its clients that eProcurement is a technology tool and, “no matter how good the tool is, if you are not using it right, it won’t have the value you need.” eProcurement needs to justify itself in terms of cost, Rubin believes. Without being certain that a company can achieve measurable, hard dollar savings very soon, it doesn’t make sense to spend millions of dollars on the technology. As has been the case with ERP systems, companies that invest in eProcurement technology must be prepared to make changes. “It has real promise, and some organizations have started to see benefit from it,” explains Rubin. “But in many companies it has resulted in a lot of expenditure and a lot of time devoted to it but no real measurable results. We talked with a company that invested several million dollars in a top-name software provider’s system but was doing only a few thousand dollars worth of transactions a month. They weren’t saving a lot of money. And then they will need to keep updating it.”
What does make sense is outsourcing. That way a company can get the technology more affordably and always will be able to maintain the most current technology without all the hassles. It’s what Peter Bendor-Samuel, CEO of Outsourcing Center, refers to as a “high-quality, impermanent solution.” No technology is perfect yet. Even so, it makes sense to do something now, rather than waiting. By outsourcing, real benefits can be achieved without the cost of investing in evolving technology.
Savings vs. Risk
Source One’s two-part program first works with suppliers to get the best deals upfront and then works with the outsourcer’s clients’ cultures to improve their processes and efficiencies. On average, it results in measurable, hard dollar savings of between 5 and 15 percent for its clients, even before improving processes and streamlining the way the corporation buys products and services.
The outsourcer initially does a thorough study of its client’s organizational structure, breaking it down into three major categories. The first objective is to understand existing spending. (How much money is spent? How many different suppliers?). Most companies don’t have this information at their fingertips, and it takes on average four to six weeks to generate the list of spending by supplier. Most companies, Rubin says, are able to identify only 50 to 75 percent of what their suppliers are doing for them.
The second goal is to understand the client’s existing technology infrastructure. (Is an ERP system in place? How are orders placed and received?) The final objective is to understand the culture. (What sorts of decision-making processes are in place?)
Most organizations, Rubin states, don’t recognize the magnitude of the savings that are possible and prefer to minimize their risks upfront. Source One accommodates that fear by working on a contingency basis, sharing in the dollars that it helps clients save. For smaller companies, with less than $100 million in revenue and a much smaller spending volume, the outsourcer extends it performance-based services through its MasterNegotiator.com division. This offering trains companies to understand where the pressure lies within a negotiation and how to shift the pressure. Clients also learn their own strengths and weaknesses and how to assess each buying situation on its own merit and determine appropriate strategies.
Rubin says most procurement people leave money on the table. Few are master negotiators — and that’s understandable, given the fact that it requires a range of skills that must be acquired. Most people in procurement, he points out, are just told to do as well as they can in getting a good deal. But buying products and services is only a small part of their job responsibilities. Often, they are responsible for maintaining supply rooms, interacting with administrators, moving furniture and equipment, making sure the factory can run, managing logistics and expediting shipments. Keeping internal people happy may be a major focus of the job, while negotiating costs may be no more than 10 to 20 percent of the job.
The moral of the story: Once upon a time, there were businesses that were afraid of confronting the truth. They weren’t as direct as they could be, as effective as they could be, and stayed attached to what was comfortable. Along came an outsourcer named Source One Management Services. It showed people that they could do better, should be open to the idea of change, and showed them how to outsource procurement step by step with proven results at each step. Source One placed the procurement people in glass slippers, maximizing their value to their companies. It was the end of the Cinderella syndrome.
Lessons from the Outsourcing Primer:
- Few companies devote enough resources to their procurement processes. Additionally, procurement people often are tasked with many responsibilities other than negotiating products and services at the lowest possible cost, thus making it difficult to maximize their value to the company.
- Most companies don’t have a good handle on how they are spending their money, let alone how to become more profitable through their spending.
- Despite the fact that outsourcing is uncomfortable because it asks people to fundamentally change the way they do business, the pressure for profitability will drive more organizations to outsource their spending.
- eProcurement is a tool that should be outsourced because the technology is still evolving and the return on investment may be low.