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Is my procurement BPO service provider overcharging me?

This question has come to me multiple times - sometimes explicitly from customers, prospects and from myself when I was an industrial buyer like them buying professional services.  Believe it or not, many procurement BPOs cannot answer this objectively primarily due to the absence of structured FTE (full time equivalent resources) computation methods which are statistically significant, and/or banking solely on their own experience and heuristics. Or it may simply be because they believe higher the better for their business.

A number of buyers themselves do not ask this question in RFIs, cost break downs or just believe on the procurement BPO suppliers' credentials to slip themselves into the comfort zone like "when a renowned supplier like M/s ABC has stated this, there would be some basis for that". On the other hand, various buyers are uncomfortable thinking "I am being quoted for 50 Sourcing FTEs and I feel that this is high. How do I validate that at RFx, during contracting and post business award stages? Although my management has left it to my decision but still...."

So what happens is that some buyers continue to accept higher quotes, hire more # of FTEs from procurement BPO service provider(s) than they should and still be completely ignorant about this problem that is eroding value. Some are ambivalent about this but don't ask this question to procurement service provider(s) and some do ask, but do not get a favorable answer because the procurement BPO service provider may not be driven by objective of creating right value for clients (e.g. a procurement service provider whose leadership is structured on Partnership model will often do this). Some buyers will choose the FTE model while they should have chosen transaction based pricing or outcome/gain-shared based pricing.

One of the CPOs of one of the world's biggest telecom firms asked me this in 2010 and I had the convincing answers - thanks to the S&P CoE of Infosys BPO Limited - of which I am part of.  We were down selected based on our BAFO (best and final offer made on clients' own assessed FTEs) and MSA (master services agreement) was being negotiated. I was conducting an on-ground due diligence in the US and found that in fact the client required 10% lesser FTEs than they had specified and we had quoted for.  So what did I do? Simple.  Just walked up to the CPO and provided him the statistical model that detailed at a 95% level of confidence that 10% lesser FTEs should be fine to meet the given procurement BPO processes, their complexity etc. for next 1 year but that would be required to increase by 30% from year 2 (they had large expansion plans in 2011-2015).

Any views from someone who is facing such a question?

Comments

Excellent view. Practical viewpoint.

Great Perspective

Very relevant question. I believe this is one of the most important reasons why BPO buyers are moving away from FTE based model to a) outcome based model – for strategic sourcing and category management work OR b) Transaction based pricing – for transactional procurement activities.

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