tackling trouble areas The Procurement Conflict Weighing the importance of cost savings through outsourcing against the value a good or service provides. By: Vince Elliott I I can’t remember when a client didn’t want savings from their outsourcing event. The outsourcing question has grown from a discussion solely about cost savings to the idea of how outsourcing can support perfor-mance goals and strategic vision. In short, market leaders have come to realize that the purpose of outsourcing is no longer a one-dimensional benefit; it’s no longer about reacting to external or internal drivers for savings, but embracing it to cre-ate a stronger competitive advantage. Much of this won’t happen when the pri-mary focus of outsourcing is about getting the lowest price. It’s About Savings And A Whole Lot More “It’s more than just picking the most com-petitive bid among prospective suppliers,” says Kate Vitasek, a faculty member at the University of Tennessee’s Center for Executive Education. She bases her thinking on the work of Oliver E. Williamson, an American econo-mist and Nobel Prize winner who pioneered a theory of transaction costs. Williamson suggests that the best outsourcing approach for any company depends on, among other things, a busi-ness model that creates performance-based relationships and, ultimately, “vested outsourcing.” Vitasek and Williamson are focused on the outcome of a sourcing arrangement, not just the up-front price. Precise measurements are essential for closely tracking performance, with an eye toward ensuring quality and customer sat-isfaction. “With value-based sourcing, the buyer and seller have a vested interest in each other’s success,” notes Vitasek. This model was further advocated jointly by the University of Tennessee, the Sourcing Interest Group, International Association for Contract and Commercial Management and the Center for Outsourcing Research & Education. They found that, the more critical prod-ucts and services are, the better off one will be using a performance-based or vested outsourcing model. David Horn of LCH.Clearnet Group Ltd., a multinational asset clearing house, suggests that focusing on spend alone is also a high-risk strategy. “It may well be an important one, but it does need to work alongside a fuller risk assessment,” asserts Horn. “It may not be a large dollar contract that has the big-gest impact on a company’s success and competiveness; it may not be the largest of relationships that offer the biggest opportu-nities for innovation and gaining a competi-tive advantage.” From a historical perspective, the idea of risk management has a fairly long track record. For example, the Kraljic Portfolio Purchasing Model was created by Peter Kraljic, and it first appeared in the Harvard Business Review in 1983. Despite its age, it’s an interesting and useful model for reducing risk and lowering costs by taking advantage of the scale of purchasing power. In this way, procurement moves from being a transactional activity to a strategic activity. Kraljic declares that, “Purchasing must become supply management.” Kraljic’s model involves four steps: Purchase classification; market analysis; strategic positioning; and action planning. Kraljic highlights the connection between profit impact and supply risk — or, savings and failure. He insists that purchasing should always be part of the broader corporate strategic, tactical and operational success strategies. As a result, he notes that it’s important for purchasers to know how to evaluate risk and overall success by having a structured and insightful approach to the measurement of the product or service obtained through procurement. Other purchasing professionals also assess risk by searching for the most likely single point of failure (SPOF). The SPOF concept is described as a part of any system that, if it fails, will inhibit the entire system from delivering the results needed. They are the greatest risk in any system that can only succeed because of an unfail-ing reliability of expected results. By specifying the performance results advocated by Williamson, Kraljic, Vitasek and others, the purchasing process is likely to deliver a higher performance impact on profits and savings, while moving from a SPOF to a control of the risk factors inherent from the procurement strategy. In the balance between savings and value, the procurement model is the decisive factor. Saving the highest amount possible may inhibit the company’s ability to deliver its products or services — something neither party wants. CM Vincent F. Elliott is the founder and chief executive officer (CEO) of Elliott Affiliates Ltd. of Hunt Valley, Maryland. For more information, visit www. EALtd.com. He is widely recognized as the leading authority in the design and utilization of best prac-tice, performance-driven techniques for janitorial outsourcing and ongoing management. Elliott is also the founder of the Chemical Free Cleaning Network (CFCN). More information about that initiative can be found at www.CFCN.info. www.cmmonline.com 41
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