Many organizations have been focusing are bringing their procurement operations in-house and/or expanding their capabilities and in-house procurement expertise. Often, these procurement groups are adopting a hybrid model of using on-demand sourcing and procurement support as needed for strategic categories (yes, a selfish plug for Source One).

However, just as many other companies are still pursuing the traditional BPO model where they are looking to outsource a significant portion of their procurement operations.  These companies may have already outsourced their tactical PO transactions to a BPO; so it makes sense to use the same firms for outsourcing the strategic sourcing and category management as well, right?   Well, it’s not really that simple.   Just because a company has proven to be able to take tactical work and outsource it for a low cost does not mean they’d be the right fit for you to do that with your strategic spends.   I’d like to take a minute to blog about a critical mistake that many of these companies are making in choosing a procurement business process outsourcing partner; especially when they simply “go for” a bundled solution with their transactional BPO provider.

Traditionally, procurement BPO solutions focused on removing or lessening the tactical burden of purchasing operations within an organization.   Quite simply, it was taking the mundane tactical purchase order fulfillment and reconciliation burden off of organizations, and of course doing so at a lower cost than in-house resources.  Now, more and more, organizations are being convinced that BPO companies can also take over the strategic sourcing portion of the procurement function.  It makes sense right, why not outsource it all, to a company that can do it quicker and more cost effectively?  At least outsource the tactical categories, right?   Surely they can’t be so strategic.  Plus; the BPO is guaranteeing me savings!

It gets more compelling than that.   Many of the modern BPOs are pitching the same things: “We’ll use our team of domestic experts that all come from XYZ Tier-1 consulting firm lineage to handle the strategic decisions and provide the category expertise needed to manage your spend.  We’ll leverage an offshore team of less-expensive analysts and resources in order to do the tactical work, and you could save as much as 50% of your total operational costs, while you get the high quality you are used to!”    In many cases, they make the business case that bundling the transactional P2P process with their strategic solutions is a no-brainer and they offer the best one-stop-shop.  In other words, they might pitch that you’ll get an on-site or relatively local team of true polished experts that will leverage an offshore back-office in order to give you high quality services as a lower price point that you are accustomed to when buying your P2P back office procurement functions.   It’s a compelling business case for sure.

In fact, this BPO hybrid-offshore model is EXTREMELY popular right now.  It helps to explain the ridiculous amounts of growth and M&A activity in the industry for these types of provider.   This includes:

  1. The large off-shore BPOs buying boutiques in the U.S. to gain subject matter expertise (Infosys-Portland, WNS-Denali, etc.) and pushing the idea of a one-stop-shop
  2. The traditional Big consultants/BPOs ramping up their off-shore offices to get lower cost resources (i.e. Accenture)
  3. The primarily offshore-based firms ramping up hiring (or contract hiring) of noted business leaders and former Big-4 consultants in order to gain subject matter expertise and credibility domestically (i.e. GEP), while trying to be the most cost effective
  4. The new boutiques, started domestically by former consultants of Big-4 who build their own capabilities of low cost resources offshore (i.e. Smart Cube)

Done right, it’s a really compelling business case.   You, as an organization, get access to typically high-paid consultants and category experts, but get their costs significantly offset by the offshore labor doing the bulk of the tactical “work”.   So, presumably, you get the work product and quality you’d expect from a domestic team, or an in-house staff, at a fraction of the cost that you typically would get had you contracted with a more traditional consulting firm.   But are you really getting what you are promised?

In my next post, we’ll dig a little bit into the proposal process and ROI that the BPOs might promise you before we later explore qualifying a procurement BPO to do your strategic sourcing as well.

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William Dorn

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