Like large enterprises, mid-size companies face continued rising prices, competitive and executive pressure to reduce costs, and regulatory pressure (Sarbanes-Oxley, for example) to improve visibility and control in their strategic sourcing total spend and supply chains. Strategic sourcing improvements are now more than a priority; they’re a necessity for survival. Yet, mid-size companies are limited in their ability to drive continuous improvements in supply costs and performance.
Steve Belli, CEO, Source One Management Services, LLC, says clients’ procurement employees are usually “bankrupt” when it comes to having time to handle all their responsibilities beyond sourcing (such as supplier identification, market research, RFP and reverse auction processes, supplier management, and compliance monitoring). It’s also too costly for companies to maintain domain expertise in every category of spend and keep up with the current market and competitive landscape in each area.
John Ragazzini, CFO, Spraylat Corporation, a global specialty coatings company based in Pelham, New York, describes his company’s sourcing process prior to outsourcing to Pennsylvania-based Source One. “Our in-house procurement folks in our six locations were really purchasing clerks. They were busy just trying to make sure we could get raw materials on the floor, not taking the time to coordinate with the other five plants or negotiate better pricing.”
Early in 2005 another company referred Source One to Spraylat. They had meetings to be sure the two companies were a good fit and that Source One had the necessary expertise and proven experience. And Ragazzini says they also “liked the Source One people a lot.”
The scope of services for strategic sourcing of indirect spend was extensive — everything except the materials Spraylat uses for paint. “Those are absolutely critical to our business,” explains Ragazzini. “Industrial coatings have a specific formula, a specific set of ingredients. We would have to do a lot of testing first before we could change suppliers of ingredients in a formula.”
Source One’s contingency-based pricing model was particularly attractive to Spraylat because it assured a win-win outcome. The model provides for Spraylat to pay no fees unless Source One generates savings beyond the agreed-upon baseline. In this model, the client pays only a percentage of the savings achieved for two years, after which Source One may be asked to re-source the item again and negotiate a lower price (and thus also reap the gain-share for another two-year period).
Establishing the agreed-upon baseline for each commodity started with Source One’s analysis of spend data in Spraylat’s accounts payable files. The baseline was based on what Spraylat had been paying for those spend items (volume, characteristics, and price), and the level of quality it wanted. Quality in a can to contain paint, for example, has to be lined with a certain kind of metal, have a certain kind of lid and handle, be a certain size, etc).
The service provider also involved the appropriate Spraylat business unit leader for each commodity in the company’s agreement as to the baseline as well as agreeing on the final negotiation with the vendors.
Then Source One used its expertise and resources to find and negotiate with vendors for the commodities. Spraylat’s existing vendors had to meet or beat competitors’ prices.
Recalling the amount of savings generated, Ragazzini says, “We drastically underestimated them! We thought we would get better performance if we incentivized them with a two-tier pricing on the contingency.” Spraylat offered to pay Source One a higher percentage if it achieved a savings above an agreed-upon target level and a smaller percentage if it achieved savings lower than the target level.
“They blew right past the target numbers we set and came up with savings we never dreamed of,” he says. “We ended up paying them more for our two-tier pricing than if we’d gone with their original offer, but we also saved more than we ever expected. They are truly professional sourcing experts.”
Relationship style is key to success
While generating savings in spend is certainly the game plan and performance metric in an outsourced procurement/strategic sourcing process, the relationship aspect is still a key to success. In addition to its sourcing savvy, Ragazzini says, “Source One’s team has outstanding businesspeople. They understand they are service providers. They bend over backwards for our needs, and they expect us to push back. They are incredibly collaborative, honest, fair-minded and ethical.”
Bradco Supply, a New Jersey-based distributor of commercial and residential building materials, outsourced its strategic sourcing for its primary communication network to over 160 locations, software compliance (licensing), purchasing of hardware, and all wireless communications contracts to Source One and also appreciates the relationship for more than the savings generated.
“They understand and adapt to our culture instead of trying to change our culture. For us, this was a make-or-break criterion. They understand our needs and how we go about doing things, and they are flexible to adapt to that,” explains Joe Hradil, Bradco’s CIO.
He adds that Source One is proactive in its communications and “always on the alert and let us know when and where they can help. They are genuinely good, hard-working people.”
Bradco was searching for a better, simpler, cheaper way to do business when it found Source One around 2001. Bradco was in the process of negotiating a communications contract at the time, and yet Source One negotiated a better deal with the vendor.
“Their knowledge of the marketplace and federal requirements goes beyond what our in-house people could keep up with. And they eliminated our need to hire new people,” says Hradil.
Bradco’s initial focus was its network costs. Hradil says, “We wanted state-of-the-art service at a great cost for our 160 locations. When we have better services provided to us, we can provide better service to our customers.”
Over time, as the relationship grew stronger, the scope expanded to include software compliance (licensing), purchasing of hardware, and all wireless communication requirements.
“They also brought us savings by consolidating our wireless communications contracts. We had hundreds — too many to mention; people had their individual phones and wireless devices and we were reimbursing them,” recalls Hradil.
Source One recently did a renegotiation of Bradco’s communications contract (voice, data, and Internet) and achieved another 40 percent savings while at the same time increasing the capacity to four times as much.
“Their access to information and knowledge of areas like software and hardware is invaluable to us, and we reach out for their advice on technology. I can’t say enough about them. I know I don’t have to worry about this area because they’re proactive,” states Hradil.
Fast path to savings
Eighty percent of Source One’s target market is mid-market companies ($500 million – $10 billion in sales) and above. It can provide end-to-end strategic sourcing (everything from defining the specification/requirement to implementing the supplier contract and even handling ongoing category management of hardware — moves, adds, changes). Alternatively, it also provides on-demand services.
“Our on-demand solution option gives us an option to not be a “yes” or “no” proposition for ongoing services. Once we know a company’s culture, if they have a sudden need, we go in and get it done. It might be a merger or acquisition that causes a sudden need for 40 new projects to do in six months. Or it might be that they just need our benchmarking or negotiation services.”
Whether provided in an end-to-end or on-demand model, Belli says Source One’s “services are a highly collaborative process.”
The services are also a faster path to obtaining savings than a company could achieve in house. Source One knows the current market and competitive landscape, which reduces the start-up time to getting to the savings. In addition, having been in the sourcing business for 16 years, the provider has built a proprietary database of commodity information (such as critical data on suppliers, products, service levels, prices, industry tariffs and regulations, and specifications for over 70,000 product and service terms structured into multiple categories across all industries). The data is confidential, and none of it is accessible through Source One’s public tools.
Source One is renowned for its sourcing tools. In May it became the exclusive sourcing tools provider on the ThomasNet.com site, the online version of Thomas Publishing, which for many years published the world’s largest supplier directory. And Source One’s WhyAbe.com sourcing and contract management toolset was recently included in the list of “Cool Vendors in Procurement and Finance, 2008” report of Gartner, highlighting companies that offer technologies and solutions that are innovative and have a business impact.
The WhyAbe.com toolset, with functionality for RFPs, reverse auctions, and contract management is free to the public, whether or not they are clients of Source One. Belli distinguishes between what the tools can accomplish as opposed to the outcomes that the Source One experts can achieve for clients. “Our tools make a company’s sourcing more efficient in these functionalities, but using our service and expertise makes a company’s sourcing more effective. I like to compare it to using other tools — using a hammer and saw doesn’t make you a carpenter.”
Belli explains another factor in Source One’s ability to generate significant savings quickly. “Creating a sourcing strategy and negotiating with vendors has an element of art in it. Over time, the more our people hone their skills, the more they become more creative at applying their skill set to get the best total value for clients’ sourcing dollars.”
Lessons from Outsourcing Journal:
- Mid-size companies are limited in their ability to drive continuous improvements in supply costs and performance, and their procurement staff is usually “bankrupt” when it comes to having time to handle all their responsibilities beyond sourcing.
- Outsourcing a strategic sourcing process eliminates the costly need for a mid-market company to try to maintain domain expertise in every category of spend and keep up with the current market and competitive landscape in each area.
- A contingency-based pricing model, with the buyer ying the service provider a percent of savings achieved, is particularly attractive because it assures a win-win outcome.
- A procurement or strategic sourcing service provider’s services are a faster path to obtaining savings than a mid-market company could achieve in house. The provider knows the current market and competitive landscape, which reduces the start-up time to getting to the savings. The provider is also likely to have a proprietary database of commodity information.