CPO Insider: Procurement Outsourcing (Episode 2) – A Business Case is Made
In many ways, our upcoming event, CPO Rising 2016: The Agility Agenda, epitomizes the research and work we have done for years, working with, advising, and surveying thousands of Chief Procurement Officers (“CPOs”) with the aim of producing the type of insight that helps procurement teams improve their operations and results. As a prelude to our event, we’d like to share our new CPO Insider series to highlight the type of “insider access” that summit attendees will gain.
In this edition of the CPO Insider series: I interview a large US-based manufacturer’s CPO about his experience with a company-wide outsourcing initiative and how he and his procurement leadership team and the entire organization approached outsourcing.
In Episode 1 of “CPO Insider,” we learned how the company arrived at the decision to outsource some of its procurement and accounts payable operations and the initial steps in the overall process.
CPO Insider: Episode 2 – The Business Case is Made
Andrew Bartolini: Before the larger corporate outsourcing initiative began, some time earlier, you and your leadership team had started thinking about outsourcing. In fact, you were looking to expand the capabilities of the procurement function because your department’s responsibilities were growing fast – you were taking on more categories, you were processing more transactions, but you were stuck with the same headcount. Was that the genesis of the project at some level?
CPO: Yes, that’s correct, within Procurement, we felt we could never get the headcount that we needed to do the job as it should be done. We had already gone through a workforce reduction, and from the top management’s perspective, we were simply not profitable enough as a company to afford additional headcount. I imagine that they looked around and thought, “Random headcount reductions are not going to be viable as a long term solution,” which I cannot fault them on. So the executive group looked at how we could increase resourcing strategic initiatives and decrease resourcing on non-strategic ones. So, they asked “What transactions and what processes are strategic? – Which are important to our company – and which ones are not?” And, in those areas which are not strategic, they asked “Are there more cost effective, viable options in the external market?”
CPO: The goal was to make reductions in our own internal expenses in a logical fashion rather than just making random cuts. So, as I mentioned, we had already considered additional transactional outsourcing – attacking our own non-strategic areas. But, when we saw the consultant’s first business case proposal, which was 100 internal headcount retained versus 350 external/outsourced, we realized that we had gotten much more than we’d bargained for. The consultant our company had used market benchmarks as the basis to recommend removing half of our raw material category managers and all of our indirect category managers from the internal workforce. When we looked at the analysis, we simply did not consider the market benchmarks that were used in the business case to be actual, existing data.
AB: Really? So, talk a little bit more about that.
CPO: I can tell you honestly, Andrew, that the consultants quoted APQC market benchmarks. So, we went to APQC, talked to them, and learned that the benchmarks that were quoted in the consultant’s business case did not actually exist. Well, some of them did, but certainly not all of them.
AB: So what did you do with this new information?
CPO: Well, even knowing what we knew, it was difficult for us to challenge the business case because, of course, the consultant presented themselves, and quite frankly, appeared to be an outsourcing expert. But the simple truth is that companies do not outsource, in any significant way, their direct or raw materials management.
CPO: When we tactfully questioned the consultant and the findings, they advised us, somewhat defensively, that they were asked by our executives to push the proposal to the extreme. We got that extreme version very early in the process.
AB: Okay, and so, with this extreme version, the executives said to the consultant, “We want to turn it up to 11 and see what’s possible in your analysis.” And as you note, the consultants followed their directive. Did the discussion ever come back to, “well, that was the most extreme business case, now let’s look at something more practical” or did they immediately latch onto the most extreme recommendation?
CPO: Yes, of course, regardless of what anybody says, my department was anchored, very early on, to the 100 number in our retained organization. We were not going to be able to change this in any significant way. So, my leadership team had a “come to Jesus meeting” where we said, “Look, we either own this and we do it to ourselves or it’s done to us.” We understood that this is the company’s direction and we needed to make sure that what is done is viable for our company. We’re going to make this happen, but we’re going to make it a viable solution for the company.
CPO: It was a very painful moment, I will tell you. People in our leadership team cried because it was so very, very painful. Our employees have never been just ‘headcount’ for us. They are valued as individuals and colleagues.
AB: The consultants begin the project and in about six months time they come back with very aggressive recommendations that were, by your executive’s own guidance, designed to be very aggressive. The business case includes data points that don’t match the market and they make a recommendation that five sixths of the organization should and could be outsourced. At this point in the process, you then realized what you had to do and that the extreme procurement outsourcing case could be the new reality?
CPO: At this time, yes. Actually, this consulting review took place over three months. The presentations were made to the executive team but, it took three more months before the procurement outsourcing business case and recommendations finally made it into our hands. The next big moment in the timeline would be around 4 months later when we returned to the executive steering committee with our own proposal – what we considered to be the most viable plan to outsource procurement.
AB: So at month 10 in the process, you came back with your counterproposal?
CPO: Right, a counterproposal……
Next time on “CPO Insider” we investigate the CPO’s counterproposal and what the executive team did with it. To learn more about topics like this, register for “CPO Rising 2016: The Agility Agenda” to learn from your procurement peers about how to push your department to the next level of performance.