Discuss, debate and exchange ideas on latest trends and opportunities in the Business Process Outsourcing (BPO) landscape. Deliberate on adding “business value” to clients, vendors, employees and various other stakeholders to enhance customer satisfaction and sustain long term partnerships.

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April 25, 2013

Sourcing: Don't make it a zero sum game

Zero Sum Game as one of the key components of Game Theory (study of strategic decision making) can be defined as "A situation in which one participant's gains result only from another participant's equivalent losses".
Some might argue that in commoditized categories i.e. non-differentiated offerings, especially 'pure products' it is the way to go, where price is only driving factor. But is it?

Zero Sum Game as one of the key components of Game Theory (study of strategic decision making) can be defined as "A situation in which one participant's gains result only from another participant's equivalent losses".

Sourcing managers often make the mistake of treating supplier negotiations as a 'Zero Sum Game' wherein they believe that, in order to achieve their own as well organizational procurement targets (read savings), they must squeeze the supplier to the maximum extent possible and that the supplier and buyers targets are inversely proportional. They tend to use moderns tools like eMarketplace, electronic auctions etc. enablers to 'drive the price down'.

Some might even argue that in commoditized categories i.e. non-differentiated offerings, especially 'pure products' it is the way to go, where price is only driving factor. But is it?

I believe that in today's time, the intent should be towards collaborative sourcing, be it in any category, and working with the supplier to develop a plan or roadmap to reach the mutual goal. Taking a leaf out of Theodore Levitt's concept of 'Marketing Myopia', wherein he suggests that "businesses will do better in the end if they concentrate on meeting customers' needs rather than on selling products", similarly goal from the procurement perspective should not only be driven by savings but rather looking at the bigger picture including not just the quantitative elements like quality, price, on time delivery but also qualitative factors like service levels, customer focus etc.

Therefore, a buyer or supplier driven entirely by price or with the belief that their success can only be at the cost other are destined to fail as with their myopic view they will miss out the bigger picture  i.e. end user satisfaction. Hence, the need of the hour is to modify our sourcing and negotiation strategies from a Zero Sum Game to a Win-Win model.

April 24, 2013

Pricing Options While Purchasing of Procurement Professional Services: Innovative Pricing Strategies

"The price point defines the sales model. It has to be simple, and you have to know how to make money with it."

Don't all purchasers want to buy products and services which help them save cash while spending? The answer to this would definitely be an emphatic "yes". The main challenge comes into play in the form of a "how". The good news is that suppliers have themselves evolved several pricing models which buyers can choose from to their advantage. This series of blogs will be specifically mentioning a few of the models in favor with suppliers of professional procurement services like BPO services, staff augmentation and project based consulting work.

As it is often said "innovation is the name of the game". Lending credence to this much apt business lingo, clients today demand for a more competitive pricing strategy. Standard pricing models drawing parallels from product pricing have waned away. This has infused the business process outsourcing sector with an additional impetus to derive and sustain the business models, on a more mutually beneficial pricing model linked to process efficiency and gains. Clients have been focusing lately on models designed around volume of transactions, sharing of savings and service provider fees linked to service delivery. A brief concept outlining of these processes will set the context on where the current pricing strategy in the professional procurement services sector is heading towards.

• Volume based pricing: This model is commonly referred to as the transaction or pay per use model in the business process outsourcing sector. This pricing model is relatively simple as the price is based per transaction count, each transaction having a fixed price and the client is charged for count of transactions. In essence client pays for the volume for which service delivery is done. This gives the client the flexibility to cater to his business demand scenario. Client is safeguarded against paying up a fixed service fee even when the service delivery utilization is low due to cyclical nature of his business. This type of pricing strategy is best suited for clients where business volumes are variable.
• Gain share model: While outsourcing a business process, clients are on the lookout to incentivize the service provider as well as share the risk of service delivery. Such a strategy has been augmented by the advent of the gain share model. The gain share model is based on the fundamentals of sharing the realized gains from delivering the client's outsourced business with the service provider. Gains realized are in terms of savings realized to the client due to cost reduction and increased process efficiency. At time of pricing the service, service provider states the savings that are going to be realized to the client. The shares of the savings that will be given to service provider are pre decided with the client and specific percentages of the gain are shared. This pricing strategy has come into favor off late with clients in various business sectors, majorly due to the shifting nature of outsourced work to being strategic from pure transactional.
• Fee at risk model:  This model is being preferred in combination with the Gain share model by more and more clients, as along with the incentive factor outlined in the earlier model the risk factor is getting addressed aptly as well here. The service provider bases the fee on the input cost of enablers like people, process and technology. If the service provider realized the committed gains to the client he is entitled to the full fee, whereas if he misses the target he is charged a penalty i.e. a percentage of the fees to be given by client for services to be rendered.

Both the fee at risk and the gain share model promote a 'mutually beneficial relationship' between the client and the service provider, as both have equal stakes involved herein. Promoting this relationship and realizing business benefits and values is the driving force which steers this ship to the shore.


This concludes the outlining of basics of innovative pricing strategies in the professional procurement services sector; laying in turn a foundation for the upcoming blog in this series which will emphasize on the pros and cons of these models. Not to forget; a glimpse into sector specific preferences for these models will be given for a better understanding of market preferences.


Invite all of you to comment on some additional points to elaborate on these in-vogue pricing models from your own experiences.

April 16, 2013

ABC of responsible procurement

Continuing on the discussion of responsible procurement (refer my earlier post here), let's start with the ABC of it.

ABC here does not refer to the basics of responsible procurement but rather to the Anti-Bribery and Corruption policy that organizations have under the umbrella of responsible procurement. The ABC policy basically comprises of the following aspects:-
Suppliers neither offer or accept bribes nor permit anyone to do so on their behalf which includes: offering or giving - directly or indirectly - money or anything else of value to any person in order to obtain or retain business for themselves, their organization or customers . A bribe would constitute offering payments, gifts, hospitality, entertainment or anything of value.

For conducting a due diligence for this parameter, generally a two-step approach is followed:

  • A standard questionnaire is sent to suppliers to gather detailed information about the suppliers for assessment on ABC parameters. The due diligence questionnaire primarily seeks information about owners, partners, shareholders, senior management team etc. Besides this, it also asks for information on any linkages with government officials and the suppliers own policies around anti-bribery & corruption practices.
  • Apart from the primary due diligence mentioned above, organisations also conduct secondary due diligence which includes using politically exposed persons (PEP) databases for assessing whether companies and their personnel are connected with governments, state-owned entities (SOE) or those associated with them. This information is important when conducting FCPA(Foreign corrupt practices act) / Anti-bribery due diligence and looking to ascertain whether the particular suppliers or their executives have any links to government officials. Organisations have tie-ups with commercial data providers who help them carry out this activity with ease.

The frequency of rescreening varies from organisation to organisation & their supplier profile. The most common options which are used are: biannually/annually or at contract renewal time.

The frequency of rescreening within the supplier base is dependent upon the following aspects:

  • The geography of the supplier (e.g., high-risk vs. low-risk regions)
  • The findings of the original due diligence (i.e., whether the supplier falls under the high risk category)
  • The type of supplier (e.g., authorised agent vs. reseller)
  • The amount of business (i.e., dollar value) being transacted with the supplier & how critical the supplier is for the organisation

The best in class organizations conduct this due diligence exercise at the vendor selection stage itself as a proactive measure towards compliance to its ABC policy. They also do conduct the rescreening exercise at a pre-defined frequency based on the factors which have been mentioned above. How does ABC fit into your organization's purchasing policies? Let's continue the discussion.

April 15, 2013

Want vs. Need - How True F&A 'Domain' Consultants Mind the Gap

In this blog post, I'd like to share recent experiences of accounts payable and general ledger transformation projects that my team and I have been part of. Our clients are large and global, and we started by putting their process challenges under the scanner to sieve their wants from the needs. The outcome? A cohesive approach that helped our clients realize better productivity.


To think literally or to think laterally, that is the question
Like any BPO service provider with customer-centricity ingrained in our DNA, we tend to take the mantra of "the customer knows the best" literally. Some of us in the finance and accounting (F&A) consulting business are more inclined towards taking notes of 'client expectations' - rather than being 'true advisors' who take a 'prescriptive approach.'

I may not give you what you want, but I will give you what you need
Over the past 10 years, I've been fortunate to work with many Fortune 50 organizations - from developing point solutions in the F&A domain to implementing third-party solutions for F&A processes. And during these engagements, I've often had a ringside perspective of how consultants can make themselves more relevant to the client by asking questions with a singular purpose - to differentiate their 'wants' from 'needs.'

In this blog post, I'd like to share recent experiences of accounts payable and general ledger transformation projects that my team and I have been part of. Our clients are large and global, and we started by putting their process challenges under the scanner to sieve their wants from the needs. The outcome? A cohesive approach that helped our clients realize better productivity.

Example 1: OCR and workflow - minding the gap to see what comes first

What clients want
"I want to implement OCR (optical character recognition) for my accounts payable (AP) function. It will make my entire invoice processing painless and seamless."

What they actually need
In reality, to achieve the above state of invoice processing using OCR there are certain pre-requisites that the AP process needs to achieve. We have tie ups with leading OCR providers. These OCR engines are embedded with our AP Workflow systems. We are transparent in telling the clients that OCR is NOT a panacea for AP invoice processing issues. Technically, OCR makes sense when the top 50 - 60% of the invoice volumes are received from a predictable / 'finite' set of vendors.

Insights from a real-world engagement
We have had interesting conversations with the AP Director of US Based Media Giant - who had similar expectations with an OCR deployment. After analyzing the company's invoice volumes, we pointed out that an annual volume of more than tens of thousands of invoices is received from thousands of distinct vendors. And the top vendor sends only a few tens of invoices in a year! We explained that OCR would not yield any significant benefit in the above scenario, and we convinced the client to conduct a thorough vendor rationalization project to significantly reduce the vendor base.

Results achieved
We implemented a phased program - and the results speak for themselves.

  • Phase 1: Implementing an AP workflow solution (without OCR)
  • Phase 2: Vendor database rationalization project and implementing OCR post that. We started obtaining 70 - 80% OCR Accuracy within 4 months of deployment

Example 2: Process ownership - minding the gap between global and local

What clients want
"I am the global process owner and will be the point of contact for all requirement gathering / process design discussions. I should be able to provide inputs to design a single global process (for 35 countries and 7 regions!)"

What they actually need
Most of us understand the importance of having a single process owner for a successful transition or implementation. However, it is equally relevant for the requirement gathering teams' solution Design teams to consider the following:

  1. Does the SPOC have control over the processes running globally and at the same time is able to address or answer regional requirements of the organization?
  2. Does she/he have the organizational buy-in to drive such changes harmoniously across the globe?
  3. Is the SPOC able to change manage (including addressing cultural nuances) associated with the implementation transcending geographical boundaries?
  4. Does the client organization have a strong 'change management team' embedded within the project?

Insights from a real-world engagement
We encountered similar challenges while designing finance process applications - around functions like balance sheet recons, cash applications and JE workflow solution for a global manufacturing major.

As part of the blueprinting process, we brought to the client's attention the disparities observed across the processes within their organization. Although there was a designated 'global process owner,' in many cases a more detailed discussion was required with a cross-section of business owners to understand local nuances, regulatory requirements, and region-specific work allocation practices.

We jointly concluded with the client that the proposed application will have a common 'core fabric' - which will be uniform across the enterprise with 'local wrappers' - which will be country specific.

Results achieved

  • Within 14 months of starting the discussions - we now have implemented 7 solutions around 40 of the client's distinct business units - and we're still going strong!
  • A single reporting solution - to manage the process performance across the globe

5 imperatives for every F&A domain consultant and practitioner
Based on my experiences, I recommend that every F&A client and practitioner should consider these imperatives to achieve true business value:

  1. Be truly consultative - don't just take notes of what the client 'desires' - but peel the onion and understand the 'true process needs'
  2. Demonstrate subject matter knowledge - and be transparent in discussions
  3. Don't be afraid to tell the client the pain involved in the journey to a world-class organization
  4. Anticipate resistance and propose workarounds for the same
  5. Ensure that a strong change management process is built in place

All of the above can be achieved from the same starting point. That is, to mind the gap between wants and needs. I'd like to hear about your experiences. As a consultant, did you ever tell your client that what they want is not actually what they need? As a client, have your providers ever "surprised" you with a solution that went beyond the remit of your initial expectations?

April 10, 2013

Virtual Market Place - The Next Level in Purchasing Automation

As in the real time marketplace, virtual market places are typically designed to exhibit the actual market dynamics of the given product/service. They combine the use of internet technology with the procurement best practices to simplify the whole procurement process.


There was a time when having a superior e-Auction capability was a matter of pride for a CPO and was the sole solution to stimulate competition among suppliers to achieve sustainable savings and to gain knowledge of the supply market.  However, it is not so anymore!

But what is driving this shift? My experience, working with several customers, indicates that there are three principle aspects driving this shift -demand on purchasers to constantly deliver typical savings of 5% to 8% YoY, further aiming for reduction in transactional TAT & transaction costs; and enhancing business satisfaction.

Also over a period of time, the processes have gone heavier, markets have changed and therefore  organizations are now constantly reevaluating  and looking at newer ways of ensuring that the  most efficient  and possible ways of buying are explored.

Lately, organizations have started considering implementing what is known as "virtual marketplace". Imagine a marketplace, where there are buyers and sellers and market dynamics, they look at mutual interest areas, negotiate and arrive at a cost, decide on logistics and delivery aspects etc.  Now imagine a virtual web spun out of buyers and sellers sitting globally and replicating a similar model through technology. Is it possible?

Yes, as in the real time marketplace, virtual market places are typically designed to exhibit the actual market dynamics of the given product/service. They combine the use of internet technology with the procurement best practices to simplify the whole procurement process.  With the virtual marketplace, Users are just required to log in, post the request, review the supplier's catalogs/bids online and award the PO/Contract accordingly. 

The marketplaces are designed typically to show functionalities in such a way that for each buy, user would be provided an option to choose either an electronic catalog of suppliers or conduct eRFX.  Electronic catalogs would guide the user to the available supplier catalogs in the system while eRFX would provide for the non-catalogue items.

The pivotal aspect of such a market place is the dynamic experience that it offers. In the case of a real time marketplace, the price of each seller is explicitly advertised in order to win customers.  Likewise, the virtual marketplaces are by and large designed in such a way that the bids of each supplier are visible to others to fuel competition among suppliers. This scenario would be applicable even to the listed catalogs where the rates of each supplier's catalogs are visible to the other suppliers and thus offering a dynamic catalog environment that will lead to transparent competition among suppliers and also build credibility for the organizations as fair and ethical buyers while demonstrating compliance to various trading laws and regulations.

Wait, there's more! These marketplaces are also additionally designed to accommodate a requisition tool blended with electronic workflow management systems so that after a user searches for the required items, he/she can compare, evaluate and eventually add items to a shopping cart! Thus, marketplace would play a dual role - of being a virtual depot of supplier catalogs and also a robust P2P system with end to end capabilities. 

Therefore, virtual marketplaces promise an end to end, user-friendly shopping experience by allowing them to shop online, submit shopping carts and award POs. The resultant benefits? Multiple!  Substantial spend savings, improved knowledge of the supply market, reduced negotiation cycle time and real time market dynamics.

The stage is set for the next level of e-Auction and various service providers are now providing this expertise. Infosys, in its continuous endeavor to help global enterprises take procurement to the next level, offers such virtual market places to provide transformational business benefits to its clients.

Look forward to your comments on this shift and the challenges you visualize in implementing marketplace solutions across various industry segments.

April 9, 2013

Contract Management: The Perils of Inefficiencies

Now, more so than ever, it is of paramount importance that procurement organizations scrutinize their Contract Lifecycle Management process for apparent inefficiencies and benchmark themselves against world class organizations.


In a recent survey by Aberdeen group, procurement professionals across industries acknowledged that their main concerns are around risk management, low visibility, and compliance, most of which are majorly impacted by their contract management process, among other reasons.

Contracts are the "Glue" between strategic sourcing and operational procurement. On one hand strategic sourcing is responsible to execute the source to contract process and the consistent improvement in purchasing activities, and on the other hand operational procurement enables the daily requisition to pay process for all goods and services

Given this vital linkage that contracts provide, it is amply evident that an ineffective 'contract management process' or as it is better known as 'Contract Lifecycle Management (CLM)', can results in multiple inefficiencies and compliance risks in the entire sourcing and procurement process of any organization.

Some of such risks are -

  • Ineffective contract creation
  • Ineffective contract value delivery
  • Disconnected negotiation processes
  • Contract deployment challenges
  • Non visibility of automated contract compliance due to disjointed AP, ERP, and procurement applications
  • Off-contract spending from contracted suppliers
  • Inefficient ERP data quality

On top of this, global trends like turbulent economic situation, ever increasing globalized procurement, focus on sustainable procurement and efficiency are putting additional pressure on procurement organizations to bring in efficiencies in every aspect of the procurement process.

Hence now more so than ever, it is of paramount importance that procurement organizations scrutinize their CLM process for apparent inefficiencies and benchmarks themselves against world class organizations. Easier said than done, hence it is not a bad idea to use the expertise of an external consultant to enable them change the outlook towards their contract management process and deploy best practices.

April 5, 2013

Responsible Procurement Makes a Difference

Despite the challenges, there are many good reasons which make the case for responsible procurement


Responsible procurement aims at incorporating social, environmental, and ethical factors into sourcing & purchasing decisions. By practicing responsible procurement, sourcing managers realize added value when carrying out necessary purchases of products & services. They spend their procurement budget in such a way that, while delivering the required goods or services, the expenditure also contributes to wider responsible procurement policy goals.

Organizations have adapted their sourcing decisions, opting to buy products & services that support their policy goals in a variety of areas including green procurement, research ethics, prevention of  bribery, corruption and conflicts of interest, employment principles, safety, health & environment practices, fair trade & competition, protection of confidential information etc.
                                                               
Responsible procurement does pose some challenges as initial investments can be a problem for shrinking budgets; some benefits of responsible procurement cannot be expressed in monetary terms.  It can also be challenging to find suppliers able to supply the necessary requirements while ensuring adherence to responsible procurement practices. This is where market research and vendor due diligence becomes imperative.

Despite these challenges, there are many good reasons which make the case for responsible procurement:

  • Introducing responsible procurement requires strategic rethinking of procurement practices. Responsible purchasing practices can make a significant contribution to delivering strategic objectives of the organization. This can include policies on environmental protection, social inclusion, equal opportunities, employment, global solidarity, sustainable development etc. This event can also be used to make internal procedures more efficient; as well as to improve accessibility of supplier information to various stakeholders. By considering both price and quality of a proposal, responsible procurement encourages companies to build high quality standards in their delivery of services or products.
  • Responsible procurement turns investments in social responsibility and environmental innovation into a competitive advantage, enhancing the brand image of the company in the eyes of its customers. Explicitly building environmental and social requirements into supplier contracts ensures that suppliers comply with relevant policies. Besides this, to ensure that the suppliers keep meeting the responsible procurement requirements, it is important to integrate monitoring into the current supplier relationships. This includes holding periodic review meetings with suppliers and continually working to identify opportunities for collaboration and development.

How responsible is your procurement? Let's continue the discussion.

April 3, 2013

Pricing Options While Purchasing Procurement Professional Services: Drawing the Parallels and Outlining the Basics

"The price point defines the sales model. It has to be simple, and you have to know how to make money with it."

Don't all purchasers want to buy products and services which help them save cash while spending? The answer to this would definitely be an emphatic "yes". The main challenge comes into play in the form of a "how". The good news is that suppliers have themselves evolved several pricing models which buyers can choose from to their advantage. This series of blogs will be specifically mentioning a few of the models in favor with suppliers of professional procurement services like BPO services, staff augmentation and project based consulting work."

Product pricing has been well defined over the decades being perfected by sectors like manufacturing and FMCG. The pricing of products has stood strong on the tenets of concepts, akin to adding profit margin to production cost, setting price to achieve target return on investment or delivering effective value to customer relative to other products.

Service pricing has however never been much elaborated nor outlined in the world of marketing management. Business process outsourcing being a burgeoning sector with a diverse global client base had initially felt the need to align the service offering pricing closely to that of a product. The professional procurement outsourcing sector has pricing models with parallels to that of  product pricing models as outlined:

  • Cost Plus Pricing:  As the terminology signifies, this pricing model makes things rather simple for the service provider.  A simple profit margin added on top of the production cost summarizes the most widely used model in the product and the service sector. The cost in case of a product is computed straightforward as the sum total of all the raw material inputs cost to make the finished product, with a pre decided profit margin computed by the manufacturer.
    In the case of a procurement service offering the raw material is in the form of people, process and technology inputs. The service provider adds up all the resources required for client's service delivery and adds a profit margin. Quantifying the inputs of the people is done so by estimating the time and effort going into the service delivery (in terms of man hours).  In the current procurment process outsourcing sector, this model is referred to and understood by the client as the Time and material based pricing model.  
  • Target Return pricing:   In this frequently used product pricing model the price is set to achieve a target return on investment. The investment as again is in the form of all raw material inputs to produce the finished productl. The key crucial difference here being the target return factor. The target return on investment is computed from the client perspective, as opposite in case of a product pricing. Process efficiency and cost reduction being, the defining factors for procurement process outsourcing. Clients want the price they pay for service delivery to be linked to the returns on investment that they are going to obtain from the service provider.

This concludes the laying of the foundation for the upcoming blog in this series on the pricing models in the professional procurement services outsourcing sector. The key focus here was on drawing a parallel with how initially procurement service pricing was heavily inspired by product pricing. The upcoming blog in this series would emphasize on how the gain share and the fee at risk model were galvanized into being from the very rudimentary pricing models. Innovation and sector specific trends with respect to these pricing models will be the essence of the next blog in this series.

Invite all of you to comment and draw some interesting parallels of how the professional procurement service pricing models have evolved and matured over the years, empowering the client and driving the service provider towards a better service delivery.

April 1, 2013

Head vs. Tails: The Shifting Focus to the Trivial Many

While the Pareto ratio does present a promising proposition in-terms of segmenting spend, are we correctly utilizing it? In most cases we take it a rational basis for us Procurement wizards to choose to ignore a key portion of the supply chain.


How many times have we used the 80/20 rule in our lives?

Ever since Joseph Juran, often known as "Father of Quality" interpreted the principle and coined the term, Paretos's principle or the wider known 80/20 rule, this has been one of the most applied and important principles guiding our focus on the Vital few.

Management experts across the world have adapted the rule across multifarious business areas, in building team focus, management of key stakeholders, clients and customers, in testing and sampling and decision making.

Procurement professionals have so far seemed to have taken the above as given. With the pressures of meeting the already existing challenges in managing critical vendors, shortage of resources and the not so motivating savings prospects from the smaller spend areas, the tail spend (the term used to represent the balance 20% spend apportioned across a mammoth vendor base) is often left alone to get longer and unmanageable. This often becomes the breeding ground for many procurement maladies like non compliances, inappropriate vendors, maverick spend and higher spend fragmentation.

While Pareto ratio does present a promising proposition in-terms of segmenting spend, however are we correctly utilizing it? In most cases we take it a rational basis for us Procurement wizards to choose to ignore a key portion of the supply chain.

Do you know that T. rex's long tail was its key to speed and hunting prowess? An animal whose long tail only served to counterbalance the up-front weight of its freakishly big head. Please excuse my poor analogy (which springs out of my obsession with this extinct species that walked the earth), but this latter portion of the spend does presents an important consolidation opportunity waiting to be tapped.

Tails up

While the importance of managing the critical spend cannot be undermined, the long tail of balance 80% vendors contributing to approximately 20% of spend presents an innate unexplored potential waiting to be tapped. Our understanding that tail-spend accounts for large number of trivial spend transactions seems myopic as tail spend transactions typically span across a wider range of categories predominantly indirect and a few direct as well. (Note:  The tails spend also need not necessarily be low value spend alone, it can also have several other characteristics) 

So just when you thought you have expended all your saving options, Tail spend presents an important opportunity to directly impact the bottom line and bring in fresher opportunities. The flanking benefits include getting spend under active management, reduction of off contract spend and mitigation of supplier risk and risks associated with non- compliance. By managing your Tail Spend, as high as 20% plus savings could be easily obtained in the first year itself and @ 5% to 8% thereafter. Now put $ computations against these percentages against your spend and you see the opportunity size.

We live in times where every penny counts and therefore its time procurement stood up and took notice of this area which represents the useful (and not trivial) many. Think again!
 

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