'Procurement outsourcing improves bottom line'
May 16, 2008

Procurement outsourcing is gathering pace the world over. In an email interview with Abhinna Shreshtha Anil Kumar Daniel, head (procurement) of Logica India, reveals interesting facets of this kind of outsourcing

Procurement activities are not traditionally viewed as something that need to be outsourced. What has necessitated a change in this view?

Traditionally none of the processes were viewed by organizations for outsourcing. But as the outsourcing phenomenon picked up and communication/connectivity improved, people began with manual intensive processes for outsourcing. Procurement, which usually needs less man-power, was viewed to be a core activity in an organization as it involved financial decisions. But, with increased focus on costs, organizations have started looking at Non Value Added (NVA) activities within each core processes and looked for options to improve or streamline them.

Global foot-print of organizations as well as vendors have also contributed towards this move. With most organizations adopting ERP systems, procurement has become a significant part in the entire supply chain. Organizations can now look to outsource basic processes such as quote requests, order processing, goods receipt and log, reporting, etc., which is repetitive and time consuming in nature.

What benefits can an organization expect?

The immediate benefits are cost and process efficiencies from productivity enhancements, process controls, compliance, and skill pool. The outsourcing organization also benefits from the knowledge base available in the outsourcing organization in terms of systems skill, market knowledge, and pool of procurement talent. This significantly helps in quick decisions, thereby improving lead time.

The IT industry in particular, tends to focus on their top-line growth resulting in less attention to their spend. Procurement activities were either a part of the administration department or were done in pockets by various departments or projects. Cost control was given least priority when you were battling against project deadlines. With cost pressures, organizations are now looking at ways and means to improve their costs.

In India especially, IT companies need to look at outsourcing procurement quite seriously. With currency appreciation and thin margins, companies should start looking at their spend to improve on their bottom lines and the only way to forward is to streamline and structure their procurement function.

Procurement outsourcing can help in centralizing the procurement of an organization; negotiate best deals in terms of cost, quality, and delivery without affecting project deadlines. This is achieved by consolidating volumes, standardizing commodities, and looking at alternate vendors/configuration from a procurement perspective.

What are the Procurement Outsourcing (PO) models available? What are the differences (if any) from traditional outsourcing models?

The PO models available are of 2 types:

1.Transaction Model - Procure to Pay, which involves basic transactions around procurement and which has the most NVA content in the same

2.Strategic Model - Source to Pay, which apart from the above includes strategic activities such as specification study, identification of source, negotiation, part/product development, price/vendor/performance analysis, inventory management, fulfillment, and asset management

Also, compared to other outsourcing areas it's worth noting that unlike traditional FandA or HRO; PO is an output-based model where savings are a direct output within the activity.

How would you define Strategic Procurement Outsourcing (SPO) and PO? What are the things that come under them?

SPO looks at the entire gamut of supply chain activities rather than just the procurement process. This covers the scope from Requirement to Delivery (RTD) involving quotes, negotiation, requests, ordering, confirmations, delivery, and fulfillment. Strategic procurement also involves analysis of spend w.r.t. commodities, vendors, and demography. This helps organizations take better decisions in budgeting, forecasting and reducing effects of the buy on projects. It involves supplier management, vendor assessment and audits, supplier performance management and consultancy.

PO is smaller and can be compartmentalized by taking any of above activities and usually refers to a smaller transactional area of activity.

There are other collaborating functions which are now getting added to the procurement function e.g. Contracts Management which is a critical area for any organization: companies are looking at value added services in this area where procurement can look at managing various vendor contracts, reviewing and Vetting commercial contracts, highlighting risks in contracts, summarisation of contracts as a ready reckoner and assist in Novation of contracts

A major concern for companies while outsourcing is overdependence on an external party. How can an enterprise reap the benefits of specialist aid, at the same time not lose control over their business process?

In today's ERP era, the organization is linked well through systems. The outsourcing model can be defined and executed in such a way that client organizations are always involved and are in control. For example, any purchase request can receive client approval before release of the same. Any contract, quote negotiation can go for final approval from the customer. It's also possible to create a matrix approval process, which will involve the customer for certain criteria, e.g. spend values, commodity types, etc.

One can ensure that the customer's control over processes is further strengthened by defined processes, comprehensive reporting, regular involvement, and planned audits.

Some companies use a hybrid model for procurement outsourcing, where they have procurement experts working with the company and guiding them, a kind of 'best-of-both-worlds' arrangement to reduce loss of control over strategic processes. Is this model feasible?

With more and more value added work getting outsourced, this hybrid model will slowly lean towards an outsourcing model to move up the value chain. The companies will greatly benefit from the talent pool available in the outsourcing organization.

For instance, at Logica we have in-depth knowledge of many processes, skills based on experience in dealing with several customers and their vendors. However, the key pieces of control can still be retained within the company and the outsourcing organization only helps with details/data enabling structured decisions.

Is PO a necessity for only MNCs or can smaller organizations (not necessarily SMEs) be benefited too?

PO is necessary for organizations which have huge spend, irrespective of size or type. If an Activity-based Costing (ABC) is conducted on a procurement process, you can see that cost per transaction is very high especially when the spend is high. Also, this is due to the fact that the requests and requirements do not flow into a procurement organization in a steady fashion, they are usually sinusoidal, hence the resource utilization in that department fluctuates. The outsourcing model helps in ironing such peaks with cross functional and shared resources, thereby doing more with less.

Procurement outsourcing is slowly coming of age as companies have realized the potential of procurement in improving the bottom line. To outsource it to a specialist is the next step to actually realize that potential.