Procurement Outsourcing - An Opportunity

This document is owned by buyingTeam © 2011 No copying or distribution is permitted without the prior consent of buyingTeam

An Opportunity

Procurement Outsourcing

Guy Strafford

Director | buyingTeam

Tuesday 10 May 2011

2This document is owned by buyingTeam © 2011

No copying or distribution is permitted without the prior consent of buyingTeam

Procurement is a prisoner of its heritage

The procurement industry at large (i.e. directs & indirects):

Is in its relative infancy

Is not intellectually mature

Is ill positioned in many businesses• It is not appreciated / recognised

Does not attract the best talent



..which produces a problem

We typically find that businesses are:

Not fully aware of how much (and what) they spend on procured goods & services Not in control of their spend

Not realising the benefits well run indirect procurement can bring

Not aware of the scale of the money they are wasting



…which leaves a lot of opportunity on the table

One of the greatest improvements to profit,with the fastest return is to improve your procurement Source: Cranfield research

‘Procurement improvement brings better return than almost every other area priority: 5x the savings of any other BPO.’- Everest, Nov 2008

‘Procurement improvement is easier to realise than almost any other area of cost release. The alternative of reducing employment has high up front costs and there are significant delays to realisation of benefit.’- Financial Dynamics research, Oct 2009

‘5 – 15% of spend reduction depending on level of transformation.’- Everest, May 2009

‘Speed to value can be measured in weeks. Fast ROI is sited by 92% of executives as a reason for action on procurement.’- Black Book of Outsourcing, 2009

Top pressures on the CFO Procurement’s impact on the CFO’s challenges



Procurement needs redefining Indirect/enabling and direct procurement are different

Factor Indirects/enabling(inc Goods Not For Resale) Directs Retail

(Goods for Resale)

Supply market

# of suppliers used High Low Medium

# of potential suppliers in the market

High Low Low

# of categories of spend High Low Medium

# of supply chain integration issues

Low High High

Process

Average transaction £ Low High High

# of transactions High Low Low

Influencers

# of decision makers High Low Low (1)

Procurement is the decision maker

No Sometimes Yes

# of requisitioners High Low (1) Low (1)

# of suppliers per Procurement Manager

High Low Low

Maverick spend issues Yes No No

Business

Business driver Enabling the business to run TCO & certainty of supply Gross margin

Procurement’s main focus Internal & supply market Supply market Supply market & consumer

Source of most value Changing internal behaviours Supply market Supply market

Ability to see savings hit the bottom line

Difficult Easy Easy



P2P and sourcing face fundamentally different challenges

P2PPurchasingInvoicingSettlement

SourcingCategory managementSourcing Business engagementSpend managementNegotiation/ contractingContract managementSupplier managementPerformance management

Benefits from Sourcing:Price/ TCO improvementsDemand suppressionLeast adequate specificationReduced maverick spending, & thereby increased spend under managementEarly payment discounts *Improved leverageRisk reductionService level improvements at no extra cost

Benefits from P2P:Process cost reduction in AP *Errors in invoicingWorking capital management improvements –cash & stockReduces suppliers’cost of supplying *Improved rebate management

P2P helps

manage Sourcing & enforce

best practice

by proving

control & visibility

Unable to estimate

Average 10- 15% on in- scope spend

1-3% for 10- 15% of supply

base

15-25% on maverick spend

50-70% reduction in AP

headcount

Up to 0.5% of spend

Unable to estimate

* Also applicable on direct spend

Enabler for effective

working capital management



Key elements of outsourced procurement –reality and expectation

What it is Contrast with expectations

Based on ability to drive more value

Not labour arbitrage

Based on indirects/enabling for most part

Not direct procurement

Probably requires spend more on Procurement team and infrastructure

Requires an investment case

Requires proximity to stakeholders

Is not about external aggregation



The key elements of any solution

Any solution to enabling/indirect procurement must take account of:

Influencing the senior stakeholder to decide / choose smarter, when their priorities are more than savings

Handle a lot of diverse suppliers in a way which can extract material value from them

Deal with the noise which comes from day to day activities of lots of junior stakeholders and suppliers, which otherwise distracts from the above



The inherent limitations of internal resource provide rationale for outsource

Unleveraged people

Short on market

knowledge

Unleveraged technology investment

Internally run resource is usually sub scale:

Under invested

Outsource

Too slow and insufficient value

Wrongly positioned



Procurement outsourcing trends



Universal Music Group Case Study



Universal Music Group Case Study

Artist

Acquisition

Production

/ A & R

Produce Physical

& Digital Product

Promote &

Advertise

Sell Music &

Merchandise

Creative

Services

Recording Studios &

Producers

Mastering /

Remixing

Photography

T‐Shirts

Manufacturing

Print SRM

Versions

Streaming

PR

CPU

European

Media

Digi‐promoVideo Rights

Licensing Deal

D2C

Recording

Budget Setting

Duplication Award

Manufacturing

Travel

MobilesProperty

Product

Agency

Bespoke

Print &

Packaging

Standard

Product

Spec Back to Back Records

Enabling Spend

MFDs

Posters, FSDUs

Consultancy

CouriersTaxis

Utilities

FMIT



Our vision is a world in which procurement is an indispensible tool at the heart of every business

Our mission is to release procurement’s potential, redefine it, move it to the heart of business, and make our clients leaner, fitter, and stronger as a result

ExpertiseExpertise – Over 200 experts across all indirect categories and sectorsLeverageLeverage – Managing more than €5bn of spend at any timeDeliveryDelivery – Unique multi-client shared services delivery modelInternational International – HQ in UK, offices in Benelux, Canada, France, Germany, Spain, SwitzerlandUncompromisedUncompromised – Unbiased, always working in our clients’ best interestPartnershipPartnership – Deep client relationships, maintained for the long term



Guy StraffordClient DirectorbuyingTeam

T +44 (0)20 3465 4545 M +44 (0)7967 [email protected]

www.buyingteam.com

Thank you

Procurement Outsourcing - An Opportunity

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