Does your Procurement BPO take the "Strategic" out of Strategic Sourcing: Part 2 – Solutioning the Proposed Cost Model and ROI of a Procurement BPO

In my previous post, I introduced the hot topic of the day: Hybrid Onshore/Offshore Business Process Outsourcing companies expanding their role to take over some of the more strategic aspects of procurement, specifically: strategic sourcing.    It’s an industry that is growing at a very rapid rate, and many companies are already testing the waters.

Here is how your existing BPO might propose it to you in order to justify their ROI and convince you of the greater savings they are achieving for your organization. They’ll likely give you a proposal comparison, which may look something like the following as an adder to your P2P services:

Strategic Sourcing BPO:

Versus your in house costs:

This proposal shows approximately a 30%, savings in operating costs.  AND, they are claiming, that you actually will see greater savings from your suppliers as well, because they actually have more resources working on your spend that you would on your own (17 FTE vs. 15).  Again, it’s a pretty compelling argument for taking a hybrid on/off-shore BPO model.  But is this cost model really the case?  Can you really expect a $500,000+ operational cost decrease while picking up greater savings from your category sourcing efforts?

Herein lies the piece I mentioned in the beginning of this post series that is often overlooked by organizations.   They tend to take the word of the provider that the onshore/offshore team is actually as uniform and collaborative as they’ll have you believe in the sales process.   Unfortunately, procurement groups, who typically understand that total value from their suppliers is more important that unit prices, often neglect to apply this same logic to finding companies to support their own internal initiatives.   This is particularly true when they might have already had a positive experience with the suppliers on the more tactical outsourcing.

Let’s take a corollary example… When a sophisticated marketing team decides they want a new creative agency, they follow a process that is a wildly different approach than a standard RFP.   This is especially true when procurement supports the sourcing process.  The process might start with a RFI, and a high-level review of capabilities through interview processes.  They’d do extensive due diligence looking at qualifications, references, and other client portfolios that were not presented directly by the marketing agency’s sales team.   The sourcing process may then expand into building mock projects in which the agencies are asked to provide creative solutions or marketing scenarios to a challenge.   Those on-site presentations and mock-ups are evaluated by a joint team of internal marketing and procurement stakeholders that review far more than just a price of the agency.   The sourcing teams may help build should-cost modeling and ensure agency markups are controlled and reasonable, in pass-through costs such as print management and media buying.  But ultimately, the decision to select a new agency is based around the total value that the new agency can provide; not simply an exercise in price…

But we often don’t see the same due diligence when selecting a sourcing support organization to assist your internal resources.   Frequently, groups rely on the CFO or a couple of senior procurement managers to make the decision, based on the results of a loose request for quotation and maybe a singular meeting with the prospective supplier.   More often than not, the decision to choose a sourcing BPO provider is not treated with the same level of care and testing than they would expect from other stakeholders, such as marketing in the example above.

Instead, we frequently see that these Procurement BPO decisions are made almost exclusively on cost.  In some situations, there might be a small level of potential supplier testing; such as asking for the bios of the SMEs, and maybe a singular interview; but more often than not, it’s all about the cost. These BPOs are selected on cost, without ever really looking at total cost or the value they provide.   In fact, the BPOs use a term to circumvent and disrupt the RFP process.  They call it “solutioning”.   In other words, they try to get ahead of the RFP for services, push hard on the fact that they have an end-to-end solution, and try to reshape your RFP or supplier selection process to put them in the best light; and will often do and promise anything it takes to win the business even if it means drastically lowering their costs to unrealistic price.  And, if the BPO is already in your organization providing the tactical outsourcing, it’s much easier to start the “solutioning” conversation to disrupt your due diligence in the sourcing process.

But, as procurement professionals know, an unrealistically low price means one thing: poor service.   They cannot produce the value you expect at the price you pay.  You will pay for mediocre services, and will be lucky to get mediocre services in return (or worse).   This is likely where you will get hit, down the road, for upsell services; under the guise of “change management” as another bolt-on-service.  Even if you don’t see directly higher costs and add-on services coming from the BPO, you’ll still see an overall higher cost for your organization, maybe not with your BPO, but certainly with the suppliers and categories that they touch.

In the next post, we’ll explore how the ROI model is impacted once these additional “change management” services are layered in.