During 2010, Procurement Leaders and Capgemini Procurement Services conducted joint research to identify the most important drivers in indirect spend and the outsourcing of indirect spend. The study was designed to understand the relationship between strategy and risk management. According to the research, procurement outsourcing is expected to grow. Procurement outsourcing is the transfer of key procurement activities and processes to a third party. In the past the main driver behind procurement outsourcing was to reduce overall costs. Procurement categorisation and vendor management of indirect materials and services are typically the most popular outsourced activity1.

The study identified the increasing maturity of the procurement outsourcing market as a major driver for growth, where outsourcing providers are offering an increased range of services and opportunities to use outsourced expertise. Over a third of procurement professionals (37%) are planning to outsource in the next twelve months and 47% within two years.

Procurement outsourcing gives organisations greater control of spending and improved visibility of both spend and supplier communities. Supplier Relationship Management (SRM) emerged as an area that Chief Purchasing Officers (CPO) are keen to address, with 70% of respondents claiming it to be a focus area. This trend could be explained by the heavy emphasis put on SRM as a consequence of the economic downturn, growing supply chain competition and the increased focus on supply chain improvements (57%).

Some of the other key findings include:

• Cost is still a major issue – 94% of respondents view cost reduction as a major challenge in an uncertain world, while 52% listed improved expenditure visibility and reduction of working capital (49%) as top procurement priorities.
• Predicted growth of outsourcing – 66% will be looking for an outsourcing provider for inventory management in the future, 58% would consider using procure-to-pay and 60% would consider using an outsourcing partner to leverage innovation (60%).
• Capability is key when choosing outsourcing partners – 86% ranked proven capability as highest in importance in outsourcing selection criteria while 84% ranked spend category expertise as important, followed by management capability (63%) and financial strength (60%).

In a Gartner report Business Process Outsourcing Vendor Consolidations: Is Your Contractor at Risk? It suggests that buyers should beware of the “nuances” of the following factors on the stability of BPO providers: the economic crisis, unprofitable contracts, loss of “marquee” deals, overexposure to the banking sector, capitalisation for deal pursuit, and levels of BPO contract cancellation. 

So what do Procurement Heads need to be aware of to avoid such an issue?

Chronically unprofitable?

Some BPO providers are carrying unprofitable contract portfolios, largely stemming from “too-much, too-soon” pursuit of deals, without much thought as to how to transition them to a standardised, rationalised, profitable state of ongoing operations.

Procurement Heads should gain insight into prospective providers’ deals to understand how profitable the vendor is. Most vendors will be reluctant to share this information, some will not, as there is a growing awareness of mutual dependency that characterises BPO. 

BPO is a partnership and trust is the key to success. Being open about the profitability of their BPO business with you, as a client, can engender a mutual understanding of what it will take to be successful in the deal, and in the longer term, this can limit the risk to both parties.

Too much or too little new business?

It is equally important to gain insight into the service provider’s track record of winning new business, particularly over a sustained period of two to three years – paying particular attention to recent contract wins. Handling multiple deals at once is a necessity in outsourcing, and buyers need to know that a vendor can successfully cater to their needs, rather than struggling to deal with a backlog of business. 

Although market share in terms of revenue may look impressive, it can be misleading. If they’re essentially running a closed book of business, it is possible that revenue may be shopped around to be sold off to competitors, or new market entrants.

Procurement Heads should also validate whether the vendor is able to exploit new trends, and new ways of conceiving, delivering and managing BPO services.  

Influenced by logo clients?

The anchor client is likely to receive platinum-level attention from the vendor due to the strategic ‘do-or-die’ value of the revenue they represent so beware of being a small fish in a big pond. The loss or prospective loss of a logo client is also an important indicator, so Gartner recommends “prudent due diligence”. Ask the logo client for a reference: find out about their experiences with the vendor and assess how committed they are to the vendor.

 
Capitalisation constraints?

Understand the cash position that your BPO brings to the table. Some vendors that are heavily leveraged or have become cash-conservative during the recession, may lack the funds to invest in significant front-end transition activities, or bid for the sort of business deals required to maintain the critical mass that is essential for the future success of the business. 

Failure to win big deals can also be a bad sign. A vendor’s bid and proposal costs often run in to millions before the deal is even won, and if a provider has spent “significant cash and months” in deal pursuit, the loss of a large deal to a competitor can be “devastating”. 

Dependence on financial sector?

BPO providers that are wedded to the banking and finance sector may face a particularly uncertain future. Exposure to the banking sector is by no means an absolute harbinger of doom, but as the financial services sector accounts for around one-third of the total BPO market globally, some sourcing executives will need to be wary. 

Financial services pure-plays and BPOs that generate more than 85 per cent of their revenue via financial services will be most vulnerable, according to Gartner. Providers with significant amounts of BPO revenue from the banking sector were the first exposed to the credit crunch, then the meltdown in the financial services sector, and wider global recession where they could be the most exposed. 

Contingencies for contract termination?

Over the past two years Gartner has seen the rates for contract cancellation and in-sourcing rise sharply, and there is no reason to suppose that this trend will be reversed. So it is increasingly important for BPO sourcing managers and their legal advisors to build exit strategies into contracts, and develop contingencies for contract termination, before signing any future deals. 

Include clauses in the contract covering change in ownership, and using language to the effect of “in the event of a change in ownership, we can terminate the contract if we so choose” (with proper consideration given to the acquiring vendor’s “forward pathway”), and taking the management of the relationship with the BPO beyond tactical operational issues. 

Set aside time through a formal communications schedule for both parties to assess the strategic health of the relationship, because relationship management can help to reduce the likelihood of contact cancellation.  

The cost of changing suppliers can be steep, and nobody wants to switch service providers unless it is absolutely unavoidable or significantly beneficial. But change is an inevitable part of the business cycle, the evolution of the BPO industry seems unavoidable, and some organisations will be unable to avoid switching providers or in-sourcing their business processes at some point over the next couple of years. So now might be a good time to take steps to minimise the pain.

The latest findings on the outsourcing industry show that one of the hottest segments this year will be procurement outsourcing. Procurement outsourcing is a provocative area and there are industry experts who have opposing views about procurement.

The jury is still out.

Aberdeen Group’s former group director, Andrew Bartolini, expresses his view on procurement: “Procurement outsourcing, in and of itself, is not evil. In certain circumstances it can drive huge value; in others, it can undercut critical business results. As technology continues to shrink the world, it will gain more traction.”

Supply Chain Digest’s “40 risks and mistakes of supply chain outsourcing” which is already a few years old, include the following mistakes that clients make today:

• Lack of risk analysis and risk-assessment planning
• Not considering the impact of outsourcing on other functions and areas of risk such as environmental and regulatory factors
• Not establishing an effective internal baseline to measure providers against, including costs, service and value-adds.
• Not having the proper internal skill set to effectively manage the selection process.
• Poorly developed and documented service or product specifications.
• Initiating an agreement with a service provider that limits flexibility in the future.

Rick Bertheaud, Equaterra’s managing director, comments on poorly managed compliance: “In the scheme of things, it is relatively easy to go out, find new suppliers and negotiate better contracts, which is the sourcing part. The toughest part comes afterwards – getting your internal customers within a client organisation to buy off those contracts. In fact, non-compliance with negotiated contracts and specifications from preferred suppliers can create significant value leakage.”

Managing director of Azul Partners and editor of Spend Matters Jason Busch writes on his blog: “I’d argue quite strongly that most BPO providers are in the dark when it comes to supplier information management, supply risk management, contract management and the finer points of supplier performance management outside of what’s in the textbook.”

Ultimately, while there are times when the vendor-side doesn’t live up to expectations or is not managed properly. Simply throwing the process over the fence and wishing for the best is not good enough.

The author of the Global Services Media article reaches a similar conclusion: “Picking the right provider is critical. While buyers should do the necessary due diligence to evaluate the provider’s, technology, delivery model and solution, choosing a partner that aligns culturally to foster an environment of collaboration and trust is even more important.”

The message of ’look before you leap’ bears repeating. Do your research, check out the vendors’ reputation, ask for references, and look at their management team and domain expertise. Like any market there are outstanding firms tied into industry associations with well-defined operating procedures and then there are cowboys.