Michael Kushner, Director — Business Advisory Services, ISG
As the complexity, size and associated risks of sourcing engagements have grown, the need for a sourcing management organization has also grown. Alternately known as Vendor Management Organizations (VMO), Enterprise Sourcing Offices (ESO) and Sourcing Centers of Excellence (CoE), I will, for these purposes, refer to them as CoEs.
No matter their title, a sourcing CoE can have a wide range of responsibilities, from identifying areas to be sourced, to executing sourcing activities, to managing service provider relationships and performance. Successful sourcing CoEs are often part of the procurement organization, but the industry is showing a new trend that situates the sourcing CoE as a separate entity that reports elsewhere. A number of influences and challenges impact the strategic positioning of the sourcing CoE within a company.
Two perspectives inform this positioning decision. The procurement group usually aims to leverage more strategic influence and gain more control of spend under management. According to procurement leaders, having sourcing under their auspices enables them to better partner with the business and impact cost more effectively. A second perspective – a corporate and business unit one – holds that sourcing needs to be handled by a senior team of strategic and skilled employees who understand the specific business areas involved and the complexity of sourcing. Sometimes these two perspectives align, and the sourcing group fits within procurement, and sometimes they do not.
In the past, procurement organizations led or directly supported many of the early sourcing efforts. These efforts were not always viewed as sourcing in the same way they are today. Early sourcing projects, like janitorial or travel services, were often handled as service or purchase agreements by the business unit or a purchasing department using a similar approach as with other goods and services. As sourcing programs have grown in size and complexity, such as with information technology (IT) and contact centers, non-procurement sourcing CoEs have become more central to outsourcing leadership and management.
Procurement as a business function today is often aligned with the Chief Financial Officer (CFO), Chief Operating Officer (COO) or Chief Information Officer (CIO) and has high market awareness for cost reduction and maturity regarding available tools, training forums, service provider options and prevalent practices. With focused capabilities to enable niche support in business units such as finance and accounting, contact centers, human resources, IT and Application Development and Maintenance, procurement has shown value to the business primarily via cost management programs and by investing in tools and resources in the source-to-pay, procure-to-pay, compliance, vendor management, demand management and spend analytics areas. Valid business cases have, in fact, shown these efforts to improve spend under management, compliance and negotiating that result in significant savings.
While many procurement groups have forged healthy partnerships with their business customers and delivered on their value proposition, others face the challenge of being relevant to the business and having “a seat at the table.” Some procurement groups have yet to make the shift to develop skills needed to address large, highly complex sourcing approaches, specialized contracting and negotiating processes and service provider management that keep pace with the business needs.
Procurement organizations that successfully oversee the sourcing CoE are usually center-led and often have the following attributes:
experience and skills that support complex sourcing deals across the business
good alignment and trust with the business units
history and impact with spend management across the business
senior procurement leadership, i.e. a Chief Procurement Officer (CPO) who reports to at least a C-level executive
Sourcing CoEs that perform well within the procurement organization operate either as a mix of resources embedded in the procurement hierarchy or, more often, as a standalone CoE sub-team.
In organizations with distributed sourcing teams or in which business units handle their own sourcing, the business units often claim they didn’t believe procurement to have the resources or skills to understand their business operation, unique needs or to lead a highly complex program. Business units like IT, contact centers, and facilities operations, therefore, performed their own strategic sourcing function or formed a specialized procurement team. As the need for sourcing grew, the sourcing CoE teams evolved outside of procurement with direction coming from an executive and supported by finance, an internal or external strategy group and the business unit leadership. Only highly evolved procurement groups were part of the discussion, which further drove the development of business unit-led sourcing and the proliferation of multiple, smaller sourcing CoEs.
Companies that depend on a great deal of sourcing are more likely to have a centralized CoE-structured team outside of the procurement organization, such as with the COO, CFO, CIO or Chief Strategy Officer. In these instances, the company-wide sourcing CoE has become a strategic move for leveraging resources, practices and service providers to support the full lifecycle of outsourcing. An ISG Outsourcing CoE Study, which included 12 large companies mostly in financial services, found that 11 of the 12 have sourcing CoEs and that these groups were less likely to report to the procurement organization than to other organizations within the company, as shown here.
*One company reported in the COO category was actually to the Vice Chairman—Operations, a more senior role than COO.
The TPI Outsourcing CoE Study found that all the surveyed sourcing CoEs outside of procurement had The ISG Outsourcing CoE Study (see Additional Resources) found that all the surveyed sourcing CoEs outside of procurement had developed strategic skills and broad impact across the full outsourcing lifecycle, to the degree the below graph illustrates, including setting standards, defining policy and setting direction with the business units, all of which drives the overall sourcing strategy.
The best position for a sourcing CoE depends on a variety of company-specific factors, including:
Maturity and impact of the procurement organization
Procurement organizations with a history of partnering well across the business and supporting complex business issues have evolved their talent and tools to support sourcing projects and have experience with business operations, contracting and service provider management.
The proliferation of procurement groups that have evolved across the business
If business units have historically been performing their own procurement function, it is likely the procurement group has not developed the talent or influence to effectively support a major sourcing effort.
The stage of development for procurement
With a spin-off company, for example, a new procurement team’s size and capability depends on the parent operation and the role of the CPO. With a start-up company, the leadership can plan for and implement a CoE within its procurement team so that skills and strategy are sound from the beginning. If a new executive is brought in to restructure and elevate the procurement team, for instance, the challenge will be to deliver sourcing CoE skills concurrent with the core procurement skills and relationships.
A sourcing CoE becomes more essential as a company’s sourcing relationships grow. The success of the CoE is related to the structure of the team and its reporting chain. Though data shows that CoEs are now more often being developed outside of procurement, a procurement organization that has developed a high level of partnership, trust and value across the organization can be an effective CoE home as well.