By Brian Rapp, Senior Director, Sourcing Solutions and Simon Woodcock, Sourcing Manager, Xchanging
Compared to the outsourcing industry as a whole, procurement outsourcing is in its relative infancy. To use a metaphor, procurement outsourcing is still learning to walk, while the Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO) industries are already sprinting ahead. But procurement is catching up and a key enabler to that progress towards maturity is a more collaborative approach to provider-client engagements to deliver indirect procurement services; that enabler is co-sourcing.
What is co-sourcing?
Co-sourcing is collaborative outsourcing. That collaboration comes from enhancements to the traditional model in three key areas:
Location - a procurement outsourcing engagement cannot be delivered over the phone from behind a desk hundreds of miles away. Co-sourcing is executed face-to-face, with a co-sourcing team sitting and working together at the client site.
People - the co-sourcing provider does not replace the in-house team, nor do they simply augment a team retained to perform the same duties. The client’s stakeholders and retained procurement team work alongside the provider’s sourcing experts to form the co-sourcing team.
Knowledge management – the provider structures a technology-enabled knowledge management framework, including process methodology, document and workflow management, and shared repository.
Gainshare model – fundamental to co-sourcing is the gainshare financial model. The co-sourcing provider is paid a percentage of savings delivered versus a typical time and material or fixed-fee model. Savings are calculated on actual spend rather than forecast from budget or contract.
Transparent reporting – the co-sourcing provider assumes responsibility to measure savings via a rigorous baselining methodology, track and report realized savings openly utilizing a web-based financial management tool.
Reduced risk – the co-sourcing provider invests capital resources upfront in the relationship and is only rewarded on actual savings delivery.
Aligned objectives – all areas of the engagement are governed mutually by review boards made up of representatives from both partners, who share the same goals. Typically, this is tiered into different boards from executive sponsorship to senior category representation and finally to business unit stakeholders.
Escalation – clear processes are in place, responsibilities are defined at all levels and robust documentation processes are used and reported to ensure visibility to all aspects of the engagement.
Performance measurement – this collaborative structure enables measurement of performance to a high degree of detail, giving the client reliable reporting against critical service levels.
The benefits of co-sourcing
These three changes to a traditional outsourcing model may not seem drastic, but they are fundamental. With BPO and ITO, it is relatively easy to lift and shift a process from an in-house team to an external provider. This is not the case with sourcing and procurement, where the function is deeply linked with the whole enterprise, from operations and supply chain to shared services such as finance and technology.
Co-sourcing makes that change management easier, by delivering the following benefits:
SHARED RESPONSIBILITY - Governance responsibility at all levels is shared between co-sourcing parties so no project is initiated unless it has been discussed, planned and mutually agreed. An ethos of shared responsibility helps to break down provider-client barriers and encourages a single ‘co-sourcing team’ mentality.
STAKEHOLDER ENGAGEMENT MATRIX - Business stakeholders are involved at all stages of the strategic sourcing process, with face-to-face interaction as often as possible. Involved stakeholders equal more supportive stakeholders and a faster route to savings.
TARGET FOCUSED - Higher savings percentages often make up only a small part of a client’s objectives and the robust co-sourcing governance structure ensures that the engagement remains focused on all of the business unit objectives.
SAVINGS – Savings are not theoretical or forecasted; they are realized at the P&L level. The provider has to measure, track and report savings to business unit, performance center and category level, providing savings visibility that is rare in a traditional model.
COMPLIANCE - In traditional procurement outsourcing, compliance often gets overlooked. A provider can claim a fee for off-contract savings without any tracking of whether the end-user procures from the contract. For a co-sourcing provider, the job is not over once a supplier contract is in place; the gainshare model incentivizes the provider to pursue initiatives to increase compliance for the duration of the contract.
TRACKING & REPORTING - Negotiating lower rates for indirect products and services is only worthwhile if those reductions are tracked through the organization to the P&L. Too often, procurement outsourcing providers have been pre-occupied with running projects and delivering negotiated savings that just get lost in the business units. Robust reporting and tracking measures are essential in co-sourcing agreements as a means of unambiguously proving savings delivery.
SUPPLIER MANAGEMENT – Through the governance structure and gainshare model, the co-sourcing provider is inherently encouraged to drive supplier value. This will be done by evaluating and managing performance against contractual SLAs and KPIs and pursuing continuous improvement opportunities.
SPEND/BUDGET MANAGEMENT & CLASSIFICATION – The co-sourcing partners work together to validate and corroborate spend analysis output from a spend management technology platform, which is integrated with the client’s financial systems. This gives both the client and the provider accurate and executable spend data to identify initiatives, savings targets, track compliance to contracts and enable better budget planning.
KNOWLEDGE TRANSFER – Through collaborative engagement, the client benefits more than they might in the traditional model from the provider’s category and market expertise and the transfer of that knowledge. Conversely, the provider benefits from the client’s intimate knowledge of their own business.
VELOCITY TO SAVINGS - The provider takes considerable risk of delivery; without savings they get no payment, while incurring most of the costs of establishing the service. Consequently, the supplier is incentivized to deliver savings early in the relationship.