Realities of Outsourcing: 13th in a Series of Webinar Presentations. Source-to-Pay Outsourcing. September 6, 2007

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1 Realities of Outsourcing: 13th in a Series of Webinar Presentations Source-to-Pay Outsourcing September 6, 2007 All Rights Reserved 2007 Les Keay Consulting Principal 2300 N Street, N.W. Washington, DC tel: Alison Turnbull Consulting Director 2300 N Street, N.W. Washington, DC tel:

2 Agenda Service offering Value proposition Service provider landscape Structuring a solution Enabling technologies Strategic sourcing Compliance management Savings commitment Fee structures Lessons learned 1

3 What is indirect procurement? The expenditures that companies make that are not directly related to the raw materials or final production of goods and services is considered to be indirect spend Typical categories often include: Travel Information technology (hardware, software, services) Temporary labor Marketing Telecommunications Business services Logistics Facilities, design and maintenance Maintenance, repair and operations (MRO) Companies typically spend between 10%-15% of revenue on indirect procurement 2

4 Source-to-Pay (S2P) outsourcing Key observations Indirect procurement is usually deemed non-core activity Therefore, not a strategic focus within the organization Contrast direct procurement where experts typically are hired Many companies have minimal visibility into their indirect spend They do not know what is bought, from whom, and how much As a result, they do not manage it well Symptoms of poor indirect spend management Minimal spend leverage across sites, geographies, business units Low compliance / maverick buys Lack of visibility into corporate contracts S2P Outsourcing differs from other BPO and ITO Potential savings from S2P outsourcing can be significantly greater Savings will be 2x - 3x greater than the cost of the deal Labor arbitrage component is typically much smaller Since local, on-shore resources / expertise for is required for strategic sourcing Most companies are under-invested in procurement which may make the S2P business case more difficult to justify Need to look at opportunity cost of implementing such a program internally 3

5 The S2P market is still in the early stages of market maturity Market observations S2P outsourcing is behind the maturity curve of both F&A and HR outsourcing Traditionally, almost half of all procurement BPO deals announced were signed with large organizations (greater than $10B in revenue) More recently, the less than $5B segment has seen significant growth (45% of deals in 2005 and 2006) 2007 has seen a renewed level of client activity investigating S2P outsourcing BPO for direct goods and services procurement has yet to take off 4

6 S2P Outsourcing spans the entire procurement process Spend management Spend analysis Strategy (retained) Business warehouse design Opportunities definition Mission / corporate strategy Business strategy Geographic strategy Purchasing Approval workflow Requisitioning Purchase order Strategic Sourcing Sourcing strategy S2P Strategy Expediting / troubleshooting Vendor selection Performance Mgmt Contracting Category management Sourcing Source -to -Pay (S2P) Procure-to-Pay (P2P) Compliance management Policies and procedures Savings tracking Reporting Vendor management Supplier relationship management Contract administration SLA/quality tracking Spend Mgmt Strategic Sourcing Vendor Mgmt Demand Mgmt Purchasing Perf Mgmt Infrastructure: Client and/or Service Provider Platform Accounts Payable Accounts Payable Master data maintenance Invoice receipt and entry T&E processing EDI/P-card administration Vendor inquiries Demand management Reporting Specification definition Standard implementation Policy Technology Infrastructure e-rfx, auctions Catalog management e-procurement Solution hosting 5

7 Value proposition Sourcing Spend Visibility Spend Aggregation Service provider critical mass in smaller categories Service provider expertise (category experts) Global presence Market intelligence Compliance Ability to track and control maverick purchases Revised procurement policies Standardized processes Operational Efficiencies Increased automation; reduced cycle times Systems & tools Productivity improvement Leverage of SP operational resources Labor arbitrage Consumption / Demand Management Visibility Reduced product selection Rationalized requirements 6

8 A majority of the savings comes from sourcing % of Total Savings Generated Strategic Sourcing Saving Tactical Sourcing Savings Compliance Operational Savings Increase the amount of spend sourced and negotiate better prices and terms with supplier Increase user purchases against long-term corporate contracts to drive greater realization of supplier spend savings Increase management of one-off spend that is not covered by long-term corporate contracts by involving category specialists in the purchasing process prior to spend being committed to suppliers Track and enforce compliance to process and contracts Reduce operational expenses by improving productivity metrics and by automating, optimizing and standardizing processes and systems 40-60% 25-50% 10-15% 7

9 Service provider landscape is evolving End-to-End IBM Accenture Good Alternates Capgemini mostly bundled BPO Infosys transaction processing (P2P) ICGCommerce technology agnostic Wipro transaction processing (P2P) Ariba focusing on software & sourcing Recent Movers Genpact recent technology offering HP cautiously entering market Niche Providers Xchanging European footprint Prosero ATKearney sourcing only Global eprocure 8

10 Enabling technologies Build vs buy Companies have two strategic options that should be considered before selecting a Service Provider: Develop own S2P platform (service provider operates on it) Leverages any existing investments in ERP / e-procurement Greater flexibility upon contract expiry Reduces integration / interfacing requirements Leverage service provider platform Speed to benefits and savings Shared development / maintenance costs across multiple companies Often get best of breed solutions SP platform is recommended for companies with limited procurement-related IT assets 9

11 Strategic sourcing Retain or not? Frequently viewed as core competency by companies Companies often have investments in sourcing resources that they wish to leverage PGS recommends always getting service providers to propose on strategic sourcing (at least as an option) To quantify the additional value-added Price to savings ratios for sourcing assistance are often 1:10 Depends on commodity maturity and compliance Ongoing sourcing assistance ratios are approx 1:5 There is some movement in the market towards client retention of category management and ongoing compliance management Depends upon existing sourcing organizational structure 10

12 Compliance management is multi faceted Contract Compliance Compliance to strategically sourced supplier contracts A large influence on procurement outsourcing business cases Almost always requires top-down mandates and often involves significant cultural change Process Compliance Compliance to procurement process typically drives contract compliance Needs processes clearly defined, controlled and monitored (including non-po process) Policy Compliance Compliance to procurement policies (i.e. flying economy class instead of business) Compliance is typically enhanced by a technology (e-procurement) solution 11

13 Savings commitments continue to be offered by service providers Identified vs Realized Need to be aware of what service provider s are proposing when comparing solutions Realized savings have a significant dependency on addressable spend levels and compliance Both of these are beyond service provider control If these are contractually built in, the resulting commitment is the same as identified savings Average fees at risk are typically 13-15% Often built into the SLA structure Savings measurement methodology & definitions PGS recommends starting with a company s own internal definitions Then add any that are missing (not previously purchased methodology etc.) Imperative to consider hard savings (those that directly impact the P&L) vs. soft savings (cost avoidance, demand management) elements 12

14 Managed Service Fee Fee structures are also still evolving Variable pricing structures Pricing based upon on a pre-determined volume within a dead band Adds and deletes (ARC / RRC) outside of dead band to accommodate volume fluctuations and business cycles Typical resource units include purchase orders, invoices (electronic vs. paper), master data updates, call volumes, etc. May see fixed fees for sub-components (e.g., PMO, IT infrastructure, Year 1 call center, etc.) Fees at Risk Service provider pays (or credits) client if a minimum level of savings is not attained Often linked to SLA structure Gainshare Client pays service provider a % of savings attained above an agreed level Can lead to relationship challenges 13

15 Spend Baselines BPO procurement key lessons learned Accurate and detailed spend analysis is key to defining baselines which have a significant impact on service provider pricing and delivery structure Recommendation: Invest time and resources in completing a thorough spend analysis Savings Measurement Mutual understanding and agreement on savings measurement methodology is key to value proposition and comparison between service providers Recommendation: Request clear definitions of how savings are measured and calculated early in sourcing process Transformation Outsourcing procurement usually involves significant process transformation But, client/service provider roles, responsibilities and resource requirements are often not clearly defined Recommendation: Invest time in developing detailed transformation plan and assign appropriate resources pre-contract signing 14

16 Les Keay Consulting Principal 2300 N Street, N.W. Washington, DC tel: Alison Turnbull Consulting Director 2300 N Street, N.W. Washington, DC tel: Questions and Answers All Rights Reserved 2007

Realities of Outsourcing: 16 th in a Series of Webinar Presentations. Finance and Accounting Outsourcing. December 6, 2007

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