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Companies that adopt an aggressive sourcing strategy typically experience sizable savings at the outset. But savings are rarely captured fully or sustainable.

Why? In my experience, companies have been able to figure out how to wring out cost through aggressive sourcing, but they don't change the procurement process. And herein lies the problem.

The best way to insure sustainable savings is to control the procurement process across the enterprise. That means consolidating purchases across business units and regions into one pool with decentralized purchases against enterprise contracts. Having more than one procurement group, coupled with limited controls and accountabilities, lets savings dissipate because in more cases than not, the staff is not implementing these basic guidelines.

A second problem companies face is they lack sourcing expertise. A procurement professional may know how to purchase office furniture or supplies but probably doesn't have the expertise for a major IT sourcing program. Often companies hire consultants to help them make these IT decisions. But what happens after the consultants leave? Too often these people have to make major decisions for which they lack expert knowledge. The people who knew about sourcing office supplies worth a few million dollars a year are now forced to make corporate purchasing decisions potentially worth hundreds of millions of dollars.

To complicate the resource / expertise issue, companies source items in specific spend categories every two years or more. In today's world 24 months can be a lifetime. Markets change in a heartbeat. These category managers are not always aware of cutting edge changes, market movements, pricing, or new products and services because they are not deep specialists or constantly in the market.

The Cost of Maverick Purchases

Another process issue is accountability. Most companies that keep their procurement in-house have not established clear-cut accountabilities. Too often employees go out of the system to buy from old friends; that always raises cost. In my experience, companies never execute a buying contract 100 percent of the time. I've found the average compliance rate is just 60 percent. For example, if the company negotiates a 15 percent savings rate with one vendor but the employees use this vendor just 60 percent of the time, the company is losing 15 percent savings 40 percent of the time.

Installing an eProcurement system requires employees to follow specific approval processes, bringing automated accountability to the process. It forces employees to buy from the approved vendor at the right prices and terms. These systems require users to follow set timelines, a rigorous procurement process, and controls.

Of course, outsourcing the sourcing function is one way to insure sustainable savings since procurement is the outsourcer's sole business. Suppliers contractually guarantee buyers a base level of savings; if they don't achieve them, they typically must reimburse the buyers. Some agreements also include gain sharing; these are features for savings beyond the contracted base level where the outsourcer puts part of its fees at risk because it believes it can generate tangible savings and improvement results.

Outsourcers have a significant number of category experts on staff in every region of the world who are in the market every day and who are aware of supply market opportunities in different regions. They have sourcing facilities and extensive databases in different parts of the world. They know when a new vendor appears in Asia with a great product; they can easily shift buying to different regions. Of course, if the buyer is in a very specialized industry, the buyer may retain buying in that specific sector.

Most of the leading procurement outsourcers learned the sourcing process the hard way - by initially sourcing their own spend. IBM Global Services, for example, has been sourcing for better than 10 years and has built an impressive procurement process, systems platforms, and category expertise with regional and global reach. These leading suppliers often can add volume leverage or provide access to more favorable procurement arrangements.

Outsourcers have developed end-to-end eProcurement platforms that link to ERP systems. One big benefit: the tools make it very difficult to go outside the process because the system refuses to pay unauthorized vendors. This limits maverick purchases. Their processes typically provide the ability to achieve high levels of compliance in the 90 percent plus range often within 6 months of transition.

If rogue employees are not following the rules at the buyer's office, the outsourcer will visit senior management and explain the problem. An outsider typically has more leverage than fellow employees and very specific contractual obligations for performance goals to get the problem under control.

An internal, aggressive sourcing strategy is the first step to procurement savings. But, in my opinion, outsourcing is the best way to insure the savings continue year after year.

Publish Date: October 2004

Copyright © 2004 - Everest Partners, L.P.

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