Business Platforms – BPO meets Technology: Reap full benefits of Procurement Outsourcing with a Unified Approach

Procurement Outsourcing (PO) burst into outsourcing scene with lots of promise & hype in the early part of this decade, however it has failed to live its fullest potential and still lags behind other outsourcing areas like FA and HRO due to various reasons. Organizations are now realizing that the potential of procurement outsourcing (PO) is not just limited to traditional cost arbitrage but effective management of overall spend, which contributes directly to the bottom line savings, especially for the ‘non core’ part. While PO deals has demonstrated numerous tactical benefits such as reduction in operation cost and sourcing savings in an isolated way, most of the organizations are still struggling to realize the full potential of PO in an integrated way. Even the much hyped ‘sole sourcing outsourcing’ deals based on gain-share model failed to deliver the targeted benefit, as most of the time actual ‘realized savings‘ was actually a fraction of ‘identified savings’ and thus form a major conflict between Finance & Purchase department in terms of procurement department performance. Organizations typically based their projected sourcing savings on the assumption that end-user community would follow the ‘contract pricing’, but in reality they have achieved low compliance & adoption in the absence of unified procurement platform and structure.

It’s not unusual to see CPO’s going through a quarterly ritual of negotiating with finance about actual savings figure and then publish a common figure based on certain unconventional yard stick. Procurement departments are also realizing the need for an embedded, transparent performance framework on a unified procurement platform which can help them self-monitor their performance in an integrated way. Organizations are increasingly looking at service provider for an end-to-end solution which can help them get into next level of maturity, driven by following business metrics:

- Common processes on a standard procurement tool with end-to-end spend visibility
- Enhance strategic-sourcing opportunities and decision making capabilities
- Improve contract compliance and so ‘realize’ savings
- Improve cash flow through better negotiated payment term
- Reduce rogue or off-contract purchase

While service providers have been able to showcase isolated success with a native improvement in individual sub functions like operational procurement, strategic sourcing, contract negotiation and account payable, the absence of a unified platform which can tie all these disparate pieces together, has resulted in sub optimal benefits. The very unique and fragmented nature of ‘non core’ buying on a non-standard processes has made it difficult for organizations to implement an in-house unified platform without undergoing major restructuring. The traditional technology approach by consolidating procurement applications and migrate to a single instance through in-house implementation can cost millions of dollars and years to implement. Organizations are in a state of ‘fix’ whether to transform first and outsource procurement later, in this challenging time where speed is crucial. Organizations are increasingly looking at alternative service model which would require minimum capital investment and can be adopted quickly.

Managed service model is not a new concept in the non-core procurement arena with numerous matured SaaS offering available due to historic reasons, and is growing at a healthy rate. Organizations are today looking beyond traditional SaaS, with complete ownership of technology & BPO as bundled services, with a single vendor delivering on an outcome based contract. However many CXO’s are also in a dilemma whether to adopt a transformational approach in this unpredictable environment as was aptly put by CIO of a fortune 10 companies in one of our interactions. His apprehension was – ‘What if in a long run you will charge me higher, and given the high level of dependency I will not have any other option but to pay you higher’. Organizations necessarily need to take a decision from long term perspective and evaluate managed service model on a BOOT (Build, Own, Operate and Transfer model) framework to have flexibility of in-sourcing i.e. in event of economic upturn or any unforeseen event, should be able to in-source unified platform smoothly as part of their contract, which is very much feasible in managed service model.