What is Procurement Business Process Outsourcing (BPO) and How Do I Do It?
Outsourcing is a common business practice that companies all around the globe utilize to combat costs. The first concept that comes to mind when thinking of outsourcing is manufacturing, as the term “outsourcing” was coined in the early 1970s. As we have continued to become digitalized and globally connected, outsourcing has extended its reach far broader than through manufacturing alone and has extended its limbs into other areas of the supply chain such as procurement.
Business process outsourcing (BPO) may be a viable option for procurement organizations that are striving to better manage their resources and optimize the spend. This does not mean that all procurement efforts need to be outsourced, but instead outsourcing procurement execution and support functions such as spend analytics and metrics management. Business process outsourcing (BPO) for procurement can easily reduce costs while quality remains the same, but you may be wondering - how do I even begin to source for business process outsourcing (BPO)?
Understanding Business Requirements
The first step when preparing to outsource is understanding your business requirements/needs. This will include drilling down to what you deem as important to your procurement organization and what portions of it can be outsourced. As it will vary from each business, you may consider outsourcing the following:
Procurement execution to manage the PR workflow from PR generation to PO execution
Administer competitive bid (CB) process for non-managed spend for PR workflow
Overseeing spend analytics through generation of custom/canned reports
Complementary strategic sourcing to the company’s strategic sourcing team
Manage and set up new suppliers
Oversee and manage all procurement metrics
Now that you have defined your business requirements and outlined what can be outsourced, it is time to start looking into building your sourcing criteria.
Building the Sourcing Criteria
Much like determining your business requirements, you will need to define your sourcing criteria based on your business needs. There is no one-size-fits-all approach to this, and you will need to tweak this concept based on importance. Having said that, here is a breakdown of some factors to consider varying in weight:
Leveraging on external procurement intelligence partners 5%
How your BPO leverages best practices from other internal BPO teams 10%
References 10%
Working the work hours of the company 10%
Cost savings mindset 10%
Governance/quality mindset 10%
Team manager to be assigned 15%
Fit to business requirements (per above) 30%
Consider having BPO cost below the line and rank the BPO contenders on the sourcing criteria above. Once you have clearly defined which BPO contenders have made the cut, then you can focus on negotiating the cost.
Creating the Contract Terms
Creating service level agreements (SLAs) and contract terms is critical when ensuring the success of business process outsourcing (BPO). Below is a list of SLAs to be considered:
Customer Satisfaction - This is measured by “noise” due to escalation from the business. Without clearly defined terms, business practices can be left up to interpretation and cause riffs between companies.
Response Times - Response times will play a direct role in your procurement strategy and correlate directly with customer satisfaction. An example of this would include how quickly BPO approves the PRs in the workflow.
Cost Savings - It may be beneficial to implement a bonus or incentive program to help motivate the BPO to generate more cost savings. This will push them to locate better deals and better optimize the spend.
Process Improvements - The BPO will more than likely have process improvement ideas that you can implement to better streamline the procurement process within your organization.
As long as expectations are clear and SLAs are defined, you will be able to revamp your procurement approach and effectively outsource the areas you are seeking.
What To Watch Out For When Considering a BPO
While the BPO approach is a cost-effective idea, BPOs will likely promise savings that won’t be achieved. The excuse normally will be that they were unable to achieve the promised savings because the spend was too low on what the BPO could influence (the business owner on the PR refuses to allow the BPO to consider other vendors).
The BPO will market itself on its strong procurement processes, but it is also likely that it will solely rely on your own processes and they will not utilize its learnings from other clients. The BPO usually will operate in different vacuums for each of their clients, whether dictated by the client or not. This is why it would be beneficial to explain to the BPO that you are open to learning and seeking to optimize your procurement practices.
As BPO resource turnover can be an issue, it is important to establish the mindset within your procurement organization that the BPO is an extension of your procurement team. Empower the BPO through respect, an open mind, and treating them like a member of your team in order to help promote retention and maximize productivity.
Getting Started With Business Process Outsourcing For Procurement (BPO)
Many companies do not know where to begin when they are seeking to venture into Business Process Outsourcing (BPO), especially when it pertains to procurement. This is where it would be beneficial to seek outside guidance and a firm with insight into BPO integration.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
