“It’s odd that you can get so anesthetized by your own pain or your own problem that you don’t quite fully share the hell of someone close to you.” — Lady Bird Johnson
If a pound of carrots doesn’t drive outsourcing vendor performance, maybe a little pain will? Read on to learn how to structure service level credits to incent vendor performance.
Note from the Author: Today’s article is part four in a series of articles discussing outsourcing metrics. We encourage your to read our other three articles: An Overview on Outsourcing Metrics, Operational Metrics, and Key Performance Indicators.
Sustainable, successful outsourcing is all about leveraging other companies’ core competencies. Despite the labor arbitrage low cost country sourcing provides or the abundant availability skilled and unskilled labor in foreign countries, outsourcing is a fundamentally the purchase of another company’s superior service, technology, or product. Vertically integrated companies are simply non-existent. Our companies’ suppliers design products, manufacture components and finished goods, manage logistics and inventory, provide customer service, facilitate payments, and provide administrative human resources, finance, and IT support. While each new senior executive’s arrival will reopen the debate of his or her company’s core competencies (witness the CEO changes at Dell and Yahoo!), the simple fact is that no company can do everything, much less everything well.
Outsourcing provides your company the ability to obtain a level of specialization and performance it could otherwise never achieve - and with a shocking degree of immediacy. The challenge for clients who purchase these services is the transformational journey necessary to take advantage of the capabilities their suppliers provide. One of the chief gripes expressed by many vendors is that their clients fail to adopt some of the best practice processes they are capable of delivering. Vendors will offer free consulting assessments, networking and educational events with experts and other clients, and inexpensive pilot projects - almost anything to get clients to bite. As a result, clients leave quality, service and cost on the table - all elements that drive client satisfaction.
The rationale is simple. Companies who outsource typically see Read the rest of this entry »
With increasingly complex vendor management programs and more interest in developing outsourcing and services relationships, it is no surprise that measuring vendor performance is an increasingly important topic on vendor management executives’ agendas. We previously wrote a very popular article on Outsourcing Vendor Metrics. Our readers have provided plenty of positive feedback via email. Overwhelmingly, vendor managers have asked for more detail and examples of each category of metric to improve their service level agreements. In this article, which is part one of several upcoming articles, we delve deeper into detailed operational service level metrics outsourcing executives can use to manage their projects effectively
A couple of weeks ago, Phil Fersht kicked off a firestorm of conversation with his Horses for Sources article on HR Outsourcing. We shared our opinion on the topic in our article debating the value of HR Outsourcing.
Well, this week, Jason Busch published his opinion on procurement outsourcing on Spend Matters. Jason is one of the preeminent strategic sourcing, procurement, and spend management experts, and we encourage strategic sourcing and spend management professionals to keep a keen eye on his blog.
In our opinion, the value of procurement is more than the output of it’s processes. Procurement’s specialized category and commodity knowledge, as well as it’s deep relationships with customers that takes years to develop to the high level of trust necessary for business executives to allow procurement to be a strategic partner, are the key fundamental core aspects of “procurement”. Vinnie Mirchandani, of Deal Architect fame, comments on this in his recent article, “Procurement Outsourcing Perspectives“.
We simply do not believe that wholesale procurement outsourcing can realize the value of an internal organization because of the entrenched customer relationships that enable and empower strategic sourcing initiatives. A deep analysis of core procurement would show that procurement functions have a few key processes: sourcing, spend management analysis, and requisition/purchase approval. Fortune 100 procurement teams add: supplier diversity, ethical sourcing, supplier performance, and green alternatives. Organizations that allow procurement teams to have real influence, also further differentiate their sourcing expertise by direct versus indirect goods and services.
In our opinion, there is little opportunity to achieve value in procurement outsourcing after analyzing these core processes. Here are a few opportunities:
Application Development and Maintenance - outsourcing application development and maintenance of the procurement/spend management software the team uses. Given the high fees Ariba and similar companies charge for software support, there is opportunity, but there is little offshore expertise in this application, much less knowledge of a strategic procurement function. With more and more companies are using hosted solutions, there’s dwindling value here.
…that’s it, and here’s why:
Not Offshore Compatible - The greatest savings in an outsourcing deal is frequently arbitrage. In this case, the internal customers are highly unwilling to accept the difficulties of offshore accents, culture, and relationships. At the very least, it wont motivate them.
Insufficient Scale - Each of the processes we’ve identified have very small scale, frequently amounting to 5-15 FTEs. For most companies, that’s too small to consider viable. The savings are minimal, too.
Process Improvements - The second greatest savings opportunity, and frequently the greatest savings lever, is outsourcing a function to an expert vendor that can make major improvements to the process due to their domain expertise. The main process of a procurement function is the management of purchase approvals, which is likely already electronic and automated. The costs of moving to a new platform are unlikely to offset the very tiny incremental value of moving to a new platform and the process improvements are likely to be equally small, with the greatest opportunity lying in the ability to provide better and more granular analytics.
Core - Generally speaking, companies should avoid outsourcing core functions. Sourcing direct goods and services that makeup of a company’s product or service is about as “core” as Michael Porter’s “core” gets.
Vendor Management Challenges - Managing outsourcing vendors for results is very, very difficult. Other than ensuring requisition approval processes flow smoothly (and these are frequently slowed by internal customer reviews anyhow), what operational metrics can be established to ensure a smooth running procurement function? There are a few, but they are difficult to track and you will frequently excuse excuse the vendor from paying penalties because your company was at fault for the failure.
Finally, and this is the most important item:
Lack of Vendor Expertise - Review the list of procurement processes and then compare that to the vendors’ expertise and you will see a significant gap. Most outsourcing vendors have little to no expertise in strategic sourcing, domain knowledge, supplier diversity, negotiations, etc. Vendors entering this space will play up their domain expertise in accounts payable and receivable functions. While there is a great opportunity for outsourcing those areas, the type of domain expertise necessary to run a spend management function is not the same. Given the specialization necessary to run this function, CFOs who really consider outsourcing procurement teams, don’t understand strategic sourcing.
Instead of outsourcing procurement functions, CFOs, CIOs, COOs, and CPOs should consider building vendor relationships with niche specialty consulting firms that can assist with specialized and infrequent sourcing activities or that can jump start ethical sourcing or green initiatives. In fact, more and more procurement functions should consider allocating 30%-50% of their budget to consulting or advisory firms to assist with strategic initiatives that their internal teams lack the skills to manage. Outsourcing vendors could not begin to tackle items such as outsourcing and advertising, among many others.
In summary, ignore the hype of outsourcing vendors and their paid advertisements in “research” papers and news articles. Procurement outsourcing is a dud today. However, we look forward to a vendor developing sufficient expertise and internal teams developing sufficiently strong performance metrics to make procurement outsourcing viable some day.
Vendor managers often are overwhelmed with metrics, but these metrics do not always give a complete picture of the outsourcing vendor’s operations. We’ve mentioned a variety of metrics to date, and today we’re focusing on the major categories of metrics vendor management teams should focus on.
In short, there are operational service level metrics, key performance indicators, and transformational metrics.
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Vendor managers know this well: It once was very easy to stand-up and count the empty chairs to know who was or wasn’t in the office today. For the more technically adept, it was easy to login to the workforce management system and know exactly what your schedule adherence was for the hour, week, or month. Once you outsourced, you lost line of sight to a fundamental aspect of operations management: ensuring you have enough agents available at peak intervals or days to meet your desired service levels.
Less skilled vendor managers will say, “That’s the vendors responsibility. I don’t get into the details, and making sure people arrive on time is one of those detailed areas that vendors should manage. After all, it’s their own people.”
They are wrong. Very wrong.
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Business process outsourcing contracts are often strong on quality and turnaround time metrics. The reason is simple: most back office operations focus on these two metrics and then grind their internal operations staff through mandatory overtime periods to work through excess inventories. Vendors, on the other hand, will charge for overtime, will resist excessive overtime to avoid expensive attrition, and will manage inventories unevenly - often giving vendor managers heartburn!
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