The cost of Utopia

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In the late 1990s and the early years of this decade, technology providers predicted that by now most, if not all, procurement activity in buying organisations would be automated. This is clearly not the case and in reality most organisations have at least in part, looked at their procurement of indirect goods and services but have done little with their direct goods and services procurement. Even for indirect goods, focus has been on the automation of the transactional aspects of the procure-to-pay cycle – requisition, authorise and order. This has tended to disregard the start and end of the process such as sourcing, contracting and settlement.

Lack of progress
It is important to understand some of the main reasons for this apparent lack of progress towards the utopia which was predicted by many, or at least by the software vendors.

There are two main barriers to achieving the depth and breadth of impact and influence that purchasing seeks to exert on an organisation; the nonsustainability of quick wins and the progressively increasing costs of change. The latter comes from the number of people impacted, software licensing costs, process change and organisational acceptance. There are also issues associated with the ongoing sponsorship and promotion of long-term change programmes, particularly if they are not seen to be central to the organisation’s core business.

In the recent economic climate there has been a concentration on cost reduction, squeezing current assets and focussing on core business activities. To achieve this some competitors are outsourcing to low-cost regions, whereas others are focussing on realising benefits from post-merger activity. The key question for many organisations is ‘Do you consider purchasing to be core to your business?’

There has also been an increase in the speed of information technology change, which has lead to a reduced time for return on asset investment in this area.

To understand how to address the issues surrounding purchasing, it is necessary to consider what is typically involved for most organisations. The various aspects of purchasing activity can be covered by three main headings: Strategy, which includes target setting and monitoring; Process, which includes both the transactional aspects of the procure-to-pay cycle and the management of other aspects associated with that category of spend; and Enablers, which are covered by the sub-headings of people, organisation and technology.

So, what options are available to organisations to move themselves away from the perception that purchasing is reactive and low impact, to a service that leads and is seen as agile and business strategy enabling? Organisations can invest in internal systems and processes, invest in internal organisation, people and skills training, or ignore the problem and hope it will go away.

Onerous task
However, none of these options sit comfortably with the cost reduction and high return on investment (ROI) philosophy. Purchasing activity by its nature impacts all areas of an organisation and a large percentage of staff, so investment in both training and system licences can be onerous.

Alternatively, organisations can either collaborate with other similar or disparate companies to reduce its costs, or source the purchasing activity or system externally.

The first option requires one or more of the organisations to be proactive and prepared to invest in identifying potential buying partners, establishing goods and services contracts with suppliers and creating the ‘partnership’ arrangements. This includes technology and contractual arrangements with the participant buying organisations. There are numerous examples of such ‘buying clubs’, more so in the public sector than the private sector, and some are long established and very effective. However there are issues in terms of minimised initial investment, speed of ROI, flexibility and addressing potential commercial competitive barriers.

The second option
The second option, commonly known as business process outsourcing (BPO), the drivers for which include:

Organisation cannot justify the internal investment required in terms of systems, organisation and staff – The costs of increasing the scope and depth of a comprehensive purchasing solution can increase both in absolute terms and relative to the expected return. Additional areas of spend, new aspects of the organisation and increasing or adding to the required skill sets all impact on both the initial and ongoing costs. An organisation may have a comprehensive ERP based back-office solution established upon which the procurement module can be rolled to all users, irrespective of how infrequently they use the process but this might be a very expensive, albeit necessary next stage of development.

Purchasing is not seen as being core to the business – Its contribution to the organisation is not always recognised and accepted. In only a select few organisations is the purchasing head a full member of the executive board. This impact is greater for the purchasing of indirect goods and services.

Expertise does not exist in the organisation at present – Traditionally, Purchasing has focussed on direct goods and services, with specialist arrangements for these. General procurement may be delegated to departments and may, in a lot of cases, be regarded as an administrative task. There may also be insufficient resources to address all spend in a professional manner without expanding both the capacity and skills of those involved.

The desire for a fixed known cost and quality of service – If purchasing isn’t addressed by dedicated teams, and many of the roles are delegated or dispersed throughout the organisation, it is often difficult to assess just how much purchasing is costing simply in terms of resources applied rather than considering any additional opportunity cost.

The perceived synergistic benefits from a multipartner process – Using a single base of skill and expertise means that a dedicated approach can be taken to each category grouping, thus providing a robust focus and reducing both risk and potential on-costs.

The combined benefits of collaboration and aggregation – The ability to share in the expansion and discovery of new supply markets and the potential benefits of increasing the overall bundled demand for a product or service grouping, depending on the competitive regime, can be very attractive.

Several aspects of purchasing activity are shown in the diagram opposite and it is interesting to look at which aspects are suitable for a BPO arrangement.

Contracting out
Original service solutions in this area tend to focus on specific aspects, normally invoice processing or other transactional aspects. However, there is no reason why the whole process cannot be contracted out. As in any outsourcing arrangement it is not normally good practice to outsource simply because it cannot be made to work in-house. There must be a carefully thought through strategy and rationale for which aspects are suitable to externalise, what type of provider is most fitting, and on what commercial and contractual basis. Most organisations will retain the overall purchasing strategy in-house, but there is no reason why the strategy for a particular category of spend cannot be developed by an external provider within pre-established parameters. Only aspects of the process that provide a competitive advantage or are core to the business should be exempt from consideration.

There are numerous examples of the external provision of requisition and order processing services. Indeed a number of the software vendors bring such added value services to the market based on their core product offerings. Equally, there is a range of offerings at the other end of the transactional process around the accounts payable operations. Realistically there are no limits to what can be successfully externalised provided the relationship is established on a basis that can be assessed, measured and adjusted as circumstances require.

Added value services
In addition to the externalisation of traditional transactional aspects of the end-to-end purchasing cycle there is a growing focus on the provision of relatively new, additional added value services. To provide these internally in a single organisation could be prohibitively expensive. Examples of these include catalogue management, both the establishment of and ongoing maintenance, process, performance and market analytics and also aspects of the fulfilment stages of the end-to-end process.

Externalisation of catalogue management is a logical consideration for many organisations. The management of electronic catalogues is a relatively recent requirement resulting from the adoption of electronic procurement practices, particularly for the requisition and ordering stages of the process. As this requirement is an additional task for most organisations, there has been less drive to manage the associated tasks in-house. External service providers can invest in the infrastructure required to provide an efficient and effective service, which is often required to provide frequent, high volume and time critical updates. In many cases there will be different updates for different groups of users. Providing such services in-house is likely to result in a compromise of either the frequency of updates, or having to settle for content that is less-user specific.

One service area, which may be driven by factors other than purely reduced cost, is that of accounts payable. Suppliers measure customer performance and targets are set by Central Government, in meeting agreed invoice payment cycles. One of the barriers to meeting these targets is the multitude of media and format in which invoices are received. This, inevitably, leads to delays in invoices being registered, circulated for authorisation and being processed for settlement. Technology investment to achieve the amalgamation of these disparate documents, most of these will be paper-based, into a single homogenous process and data flow is not costeffective for most organisations independently. Examples of such technologies include high throughput scanning and optical character recognition (OCR) applications. However, provided as a shared service with high technology utilisation through bundled throughput, this can result in benefits not only for the end customer, but also for their suppliers.

An invitation to share
This sharing of the technology investment is a frequent theme in most BPO arrangements. In addition to there being no need for each individual customer to invest in the technology for themselves, there is also the opportunity to share in the use of more advanced and higher value-added infrastructure. One area in which this can be seen is the provision of analytics around supplier, process and market performance. Investment in extensive data warehousing and analytics packages will not be justified for individual organisations.

However, accessing information from a shared services arrangement can be cost effective and can bring detailed insights into overall supply chain performance which would not be otherwise available. Such analytics are particularly important in areas such as supplier performance monitoring and contract management. They can also provide business critical input into performance payment discussions, future contract negotiations, and subsequent category sourcing strategy decisions.

Several of the above examples relate to the barriers faced by individual organisations in terms of achieving target ROI if there is a significant initial investment in information technology required. This applies equally to investment in back office or enterprise resource planning (ERP) solutions as it does to specific solutions, for example a data analytics or catalogue content management application.

Although, on the surface, it appears that the drivers for public and private sector organisations may be very different, they can both benefit from arrangements like those described above. For private sector companies such services can assist in improving bottom line performance, allow focus on core business activities, free up resources for investment elsewhere in the business, and ensure that there is access to current leading-edge technology and processes.  For a public sector organisation the latter considerations all apply, and in addition, the quality of service provision can be improved.

Service providers
In summary, there are service providers who can fulfil many purchasing activities more effectively and efficiently than any one organisation can ever hope to do.

Organisations should consider this as a route to providing these services for both new uses within their organisations, but also for services that are currently being provided internally. Perhaps only by critically examining what can be provided externally will it be possible to form a view as to whether there is a better way than the current in-house provision.

David Harrower is an executive consultant in the Atos KPMG Consulting Operational Transformation team.

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