Apparently, a lot of procurement organizations are messing up a lot of outsourcing deals. A recent piece about why the lowest-cost outsourcer isn’t always the best sparked a lively discussion on LinkedIn about how procurement (obsessed with costs) and IT (obsessed with quality) can work together to drive down long-term costs and driving up long-term quality.
At the recent Nearshore Nexus conference, the fight was over whether outsourcing should “belong to” the procurement organization or the business that needs the outsourced skills. As it turns out, a successful outsourcing engagement requires both to bring their respective skills to the table. The challenge is creating a structure and process for that to happen.
Atul Vashistha, chairman and CEO of management consultancy Neo Group in San Francisco, described a how the division of responsibility worked in one recent engagement. The procurement organization, among other things, spent time with the business to create a clear set of requirements, reviewed and narrowed the list of suppliers with the business, worked with the legal department to create the right legal terms and the business unit to create the right business terms.
He contrasted that with another, high-tech firm where he said “the procurement organization lacks services sourcing and procurement skill sets but does not recognize it.” This procurement organization focused on signing a master service agreement without finalizing the requirements, failed to perform a “due diligence” check of the outsourcer’s operations capability, and pronounced its efforts a success by showing the master service agreement and the low rates charged by the outsourcer.
Richard Knudson, a San Diego area consultant, has an even more structured take on who should do what. The procurement office, he says, is responsible for doing a site audit to assure the vendor has the facilities, staff, and processes to perform the required work. Procurement is also, he says, “the guardian of ensuring that the formal agreement process includes ‘in-process’ checks’ and interim evaluations” and that they are properly followed by the business unit.
The business unit, on the other hand, is responsible for ensuring that the knowledge and skill of the staff is suitable for the specific functions to be performed. (This is where the business unit can weigh in on “intangible” factors such as the cultural fit with the outsourcer, and the quality of their work.) The business unit also, he says, does the technical and management oversight of the products or services being delivered.
This process should, Knudson says, produce a consolidated risk factor for each vendor that includes cultural, communications, capabilities, and any risks of corruption or geopolitical upheaval. His bottom line: The selection and management of an outsourcing vendor must be a joint effort between IT and procurement, and must be properly structured to succeed in the long as well as the short run.
But as we all know, developing rigorous structures and processes takes time and money, which nobody has any extra of these days. Maybe that’s why Vashistha says “too many organizations still incentivize procurement professionals by cost savings in contracts” rather than long-term total cost of ownership. Of course, basing incentives on the long-term TCO of an outsourcing effort assumes an organization even knows how many applications it has, much less their cost.