How to get outsourcing procurement right
Outsourcing is something that makes many procurement managers nervous, and with good reason. Statistics reflect that there is an incredibly high rate of failure in outsourcing projects. According to the Aberdeen Group: ‘Nearly 50% of outsourced projects fail outright, or fail to meet expectations.’ The report from the Gartner Group is even less promising as ‘80% of outsourcing deals fail to achieve their targets.’
Does this mean that across the board outsourcing simply doesn’t work? Or is it because the procurement process is flawed and companies are not ensuring that the outsourcing they undertake will work for their business?
Common reasons for failure
One of the primary reasons for failure is not finding the right outsourcing partner, and this can be underscored by unrealistic expectations, incompatible cultures and poor service quality..
Many businesses make the mistake of contracting for transformative change, without considering if that change is even possible. Or they continue to contract with the same partner, expecting different outcomes. Relationships are critical, and if these are not built on a solid understanding of what is required and expected, or if they get off to a poor start, the project is more likely to fail.
Moreover, if the commercials are misaligned or if there is poor governance, then the desired outcomes are unlikely to be realised.
While all of these are contributing factors to failure, what this highlights most is that the approach to outsourcing hasn’t been thought through properly, and it is this lack of a strategic approach that ultimately trips up the process.
Mitigating the risks
Having the right strategy means creating a clear scope of work and expectations that are clearly defined and regulated by commercial mechanisms. Finding the right partner means looking for an organisation that has the right level of expertise needed, and that their teams are made up of the right kind of people who will understand your objectives and be able to work towards delivering them. There must also be in place a clear governance framework to manage performance and risk and have contingencies well defined.
Creating an outsourcing strategy that works
Essentially, outsourcing procurement should be an extension of the business operating model. If you have a clear vision and know where you want to be in terms of your business, then that serves as the ‘North Star’ to guide your decision making. It is out of that vision that you’ll be able to define what the customer experience should be, what kind and level of service is to be expected, how you will engage with customers, what technology will be used and what the operating principles of the organisation will be. And all of this is done within the context of creating more value for your customers and your business.
It is within this framework that the outsourcing strategy should be defined. There are several outsourcing models that, for a price, shift more or less of the risk between the organisation and the supplier. The majority of models will be a mix where elements of the risk are shared. To mitigate against the risks, your agreement should include a clear commercial structure that aligns with your business goals. For example: If an objective is to improve cost efficiency, you may want to consider what this looks like from the perspective of cost reduction, operational efficiency and customer efficiency. As you break down each of these elements and their associated metrics, ensure that they align with the goal of protecting and enhancing the customer experience. In terms of the supplier, their profitability should be directly linked to delivering on the agreed objectives for the organisation.
One of the key elements to successful outsourcing is to ensure that there are commercial mechanisms in place that support the business objectives. The mechanisms will hold the vendor to account and should include tools such as forecasting, quality controls and incentives. It is important to note that these tools do not work independently but rather in conjunction with one another across the full scope of the outsourced work.
Making it work
The governance frameworks that you put in place should outline clear responsibilities for both parties. When you say that you want added value, be sure to clearly define what this should look like, specifically in relation to the customer experience. Remember that in partnering with a supplier, you’ll have contractual obligations too, so ensure that you keep up your end of the bargain by maintaining your quality levels. Empower your team to manage the relationship and train them to understand the difference between what they can do as opposed to what is expected of the supplier. Finally, remember that you’re outsourcing to them for their expertise, so engage and partner with them in a way that benefits both of your businesses.