CPO Insider: Procurement Outsourcing (Episode 3) – The Counterproposal
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 this “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.
In Episode 2 of this “CPO Insider,” we learned how the initial outsourcing business case was developed, and how this CPO and his team took greater ownership of the outsourcing process.
CPO Insider: Episode 3 – The Counterproposal
Andrew Bartolini: So, three months into a review of your entire procurement operation, the consultants that were brought in and told by your executives to present an ‘extreme’ proposal do exactly that and propose that the company should retain 100 and outsource 350 of your 450 person department. It took three more months for that proposal to make it into your hands. So, how did you respond?
CPO: We immediately argued that the consultant’s case was simply not solid. We knew the numbers used in it were flawed (and we believe that the executives also knew this – maybe not as surely as we did. My team had previously assessed that we could not outsource 100 percent of the transactional work that was done within the corporation. And, by ‘transactional, I mean the conversion of requisitions to a PO; follow-up on goods received; issue resolution; indexing and payment; managing return shipments, and so forth. Under the consultant’s recommendation, 100% of that would go. We requested and were granted the opportunity to make a counterproposal
AB: So now the ball is in your court , but at the same time, you are playing defense. What strategy did you take? Did you attack the entirety of the consultant’s business case or did you….
CPO: No, we understood that the case was very aligned with the desires of our executive team. Despite the very obvious flaws in their case, we pursued a more incremental defense. We felt that we could argue for and reasonably retain an additional 50 heads. So, when we came back a few months later after our own very detailed review, we said that we had to retain all category manager and that we had transactional activities that we needed to retain, and in fact we were legally obligated to retain (due to government controls). So our counter was to retain 150 and outsource 300. Going into this process, we never could have considered that such a large of a portion of category managers could reasonably be outsourced So, the consultant’s proposal did not take into account the nature of our business and that we have certain restricted materials that we make and sell. And those materials cannot be touched by a foreign national unless you meet a certain criteria.
CPO: So, in our counterproposal, we proposed to retain 30% of the total transactional volume with a small group of buyers who would not be kept within a function but who would be moved to a procurement shared services group that was housed within our current shared services group. So, in other words, we would bifurcate the organization. We would retain only the strategic procurement and partnerships aspects like category management, strategic sourcing, contract management, and risk management. All of the back-end activity would move into the procurement shared services group, and out of that, all of those activities, 70% of those would be outsourced including AP.
AB: So, you proposed 150 back to the executives after the consultant had proposed 100. What happens next? Does the consultant come back with a second proposal? What did the executive committee think?
CPO: The consultants had already receded into the background so we were just dealing with the executive committee and there was certainly some degree of, “why do you need those extra 50 people?” Frankly, there was a huge amount of reluctance to increase the retained baseline by 50. But, there were many, many faults in the business case, too many to mention, but, because this business case was developed in secrecy and existed for months without our knowledge, the consultants did not gather the right data and benchmarks – what was used was not accurate since it was not obtained from us. We could have really provided a better view of our actual costs and what our people were actually doing. But, because we were excluded, some of the estimates that were done in the business case did not reflect our reality and were not particularly viable. So there was heated argument about that. Nonetheless, there was a huge reluctance to increase the baseline of retained people by 50.
AB: So a flawed process Do you think that this was due to the lack of understanding of how to do this work by the consultants or was that because someone in the executive team has said, “We need you to get to this number – just get us to this number – that’s what you’re being paid for,” or is it something else?
CPO: I think the consultant we used did not have a very high expertise in outsourcing; it’s a new practice area that they wanted to develop. And then, secondly, of course the executive team wanted to believe that there was a gold mine here for us if only we would follow their plan.
AB: What was ultimately decided – how many were retained and on what time frame?
CPO: We are now in month 13 of the process and it was agreed that we would retain 160 but that once the transfer was completed and the outsourcing arrangements were stabilized, we would go down additional headcount.
AB: So in month 13, what is the targeted headcount? Was it 100? Was it 150? Was it something in between?
CPO: No, at month 13 – I think the headcount target was around 160 and then with the commitment to go down an additional number post transition. We took steps. We said we’d retain 30 percent of the team for transactional volume. We retained the buyers, we moved those people. So then we have a counter-proposal, which is approximately 150 plus students and contractors, And with contractors, it’s easier.
AB: And so, ultimately your counterproposal was accepted?
CPO: Yes, for now but we would go down further.
The CPO’s counterproposal had been accepted in a hard-fought battle. Now they have to execute the plan. Next time on “CPO Insider,” we wade into the RFP waters and learn how the market responded to this CPO’s procurement outsourcing RFP. And then 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.