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CPO Insider: Procurement Outsourcing (Episode 5) – Vendor Selection

In many ways, our upcoming event, CPO Rising 2016: The Agility Agenda, epitomizes the research and work we have done for years, working with, advising, and surveying thousands of Chief Procurement Officers (“CPOs”) with the aim of producing the type of insight that helps procurement teams improve their operations and results. As a prelude to our event, we’d like to share our new CPO Insider series to highlight the type of “insider access” that summit attendees will gain.

In this edition of the CPO Insider series: I interview a large US-based manufacturer’s CPO about his experience with a company-wide outsourcing initiative and how he and his procurement leadership team and the entire organization approached outsourcing.

In Episode 1 of this “CPO Insider,” we learned how the company arrived at the decision to outsource some of its procurement and accounts payable operations and the initial steps in the overall process.

In Episode 2 of this “CPO Insider,” we learned how the initial outsourcing business case was developed, and how this CPO and his team took greater ownership of the outsourcing process.

In Episode 3 of this “CPO Insider,” we learned how the CPO and his team (reluctantly) took ownership of the outsourcing process, and proposed a counterproposal to the original procurement BPO business plan.

In Episode 4 of this “CPO Insider,” we followed the team’s development and launch of an RFP to outsource procurement, accounts payable, and many other corporate functions.

CPO Insider: Episode 5 – Vendor Selection

Andrew Bartolini: So you have moved from inviting 12 vendors, receiving and evaluating 10 responses and ultimately down-selecting to four finalists that are invited in. You start to look at the vendors’ locations and the specific capabilities that they possess for all of the different business processes that are in scope for the larger project, but at the same time, procurement and accounts payable capabilities and approach are the primary determinant. You’re not also evaluating how good they are in HR at this point, right?

CPO: When they came in and pitched, we were more focused on procurement. We did want to go with a full-service firm that could take on the whole company. But at this point, we framed the opportunity as ‘if you can come in and be successful with this procurement and accounts payable pilot, we can extend your contract to cover the other areas’ that were in scope across the company.

AB: Right, so did you feel that of the 10 responses that they could all do what you asked them to do, or was it that, like, “we went to four because that’s all there was?”

CPO: We actually had in-person meetings with most of the 10 bidders before getting to the four finalists. One memorable thing that happened in the initial meetings was that one of the companies brought in their so-called procurement expert who, it turns out, had only been employed for three days – or maybe he wasn’t even employed at that time. They brought him in to help them with the pitch and represented him as an employee when he wasn’t. Honestly for the business we were bidding out, I’m surprised at the general level of quality that exists in the market. We felt that most providers didn’t have the competency required when we reviewed their RFP responses. We did a proper RFP review; we had internal sessions where people could ask questions, participate, challenge, and clarify things. We brought those comments and concerns to each vendor and through that we had found that some of the groups were simply not strong enough in procurement outsourcing or, at least, they didn’t seem to understand what we were looking for. In general, the RFP response quality was not adequate and for most, the pricing was way off. That was a surprise to me, one of many that we’ve discussed.

AB: I would say that procurement outsourcing is not a mature industry. A few industry leaders, but we don’t see broad-based capabilities as you may in IT outsourcing. Anyway, you invite four providers in, tell me about that.

CPO: It’s always interesting to hear pitches. One of them was a first-tier outsourcer who came across as very rigid, like a machine. They expected a certain margin for their business. They would follow all of the rules but they didn’t seem to have a lot of flexibility. And, we had one of those almost comical business meetings where we met with their senior VP who had flown in, and he said that their company graded new clients on something like platinum to diamond to gold to something scale. Afterwards, I was joking with the team and said that we would be “charcoal” status and that while he would fly to meet the diamond and platinum customers, he would probably meet with us once every three years.

AB: [Laughs] Sure, I know the type. We see it in the analyst realm where some of the largest players in the space think they can command the business simply by who they are – not by what they do and how they do it – not a single thought about delivering value for money. That approach works in some instances, but I’m guessing it didn’t for you.

CPO: Yeah, so no-one was thrilled by this VP and his team. Honestly, with some of the vendors, we didn’t think we’d be important enough for them because we’re a mid-sized company. And basically, like all companies, we wanted someone who valued our business and would pay attention to it. So, we didn’t think that this would be a good company and eliminated them.

A second, large full-service team completely missed the boat in its presentation. It is like they had never seen our RFP and even worse, that they had never even read their RFP response. We’re procurement professionals and we pride ourselves on crafting clear RFPs and directions to suppliers. We figured that if this company couldn’t navigate a two to three hour meeting based upon a basic RFP, they could never successfully tackle a transition plan. That group remains a complete mystery to me and they will remain a complete mystery to everyone at my company as long as I am here. They were obviously eliminated.

AB: Two down, two left

CPO: The two finalists created a competition between our incumbent AP outsourcer and a new company. Between the incumbent and the new vendor there was a significant cost difference – the incumbent was at a much higher cost than the new competitor. Beyond price, this new company was very accommodating in what it was willing to do to win the business. We had sent out a contract with some of the terms that we had wanted; they seemed willing and able to accept almost all of our terms and made no bones about the fact that they wanted our business. They were a second-tier outsourcing company looking to grow. But when we met with their management – they seemed very solid. We started to lean heavily in one direction [the new vendor] while opening up negotiations on both fronts.

AB: Remind me, how long was the RFP process?

CPO: A couple months.

AB: So price and flexibility were big factors. Anything else?

CPO: Those were the primary factors. I should mention that each provider needed to bring in a partner to support their bid.

AB: Really?

CPO: I shouldn’t get into too much detail, but both finalists needed support on the more strategic parts of our operations.

AB: Okay, let’s leave that point for now. Was the consultant who advised the executive team and developed the aggressive business case and recommendations involved in the selection process?

CPO: Yes, they were somewhat involved in the selection process, but, they did not make the determining vote. And then, we found out during this process that our consultant had an undisclosed conflict of interest with the new vendor. I believe our consultant was also the independent auditor of the preferred outsourcing vendor.

AB: Ah, brilliant!

CPO: Yeah, but it gets better! We had never heard of the vendor when they had brought forth the BPO’s name as a qualified bidder. And, mind you, this was a group that was trying to control everything in the project and then suddenly they weren’t involved in any of the actual contract negotiations? They were billing like crazy, and yet, wouldn’t sit in the room with any vendor and they offered no assistance in the development of the final SLAs or any contract terms. We had a thought that they didn’t want to be involved because they had no idea how to advise us. They definitely oversold their capabilities to our executives, but this was getting ridiculous. Finally, we found out about their conflict of interest and their actions started to make some sense. Nonetheless, it was another needless surprise … and to be fair, they claimed that they had previously disclosed potential conflicts to the executive committee – which may be true, but they were not upfront with me and my team.

AB: Did your consultant introduce their client before you knew of the conflict?

CPO: Yes, but I don’t think they exercised undue influence in the selection process.

AB: So, you liked the BPO you selected independent of what the consultant had said?

CPO: Yes, there was consensus on our team that we had selected the group that we felt was the best provider. If the consultant had come in and said, “You know, we think they’re hands down the top firm,” or whatever, we would have paid some attention to it. But they were not heavily involved there probably because they had a conflict. They were not a determining factor for who we selected. My team had been the one driving the project plan and reviewing the bids and implementation plans and so forth. The consultant’s job seemed to be to highlight the outsourcing opportunity to our executive team and to tell them that there was a goldmine out there if we could just rid ourselves of all this transactional work. They did what the executives wanted them to do. Their recommendations meshed perfectly with the mindset of our executives – that “we have a lot of people who are highly paid who are doing very basic jobs, and we need to get rid of those people and outsource that work.”

Vendor selection? Check

Contract execution and implementation? Tune in to Part VI of this series where we learn how this CPO and his staff had to make some tough decisions, and then register for “CPO Rising 2016: The Agility Agenda” to learn from your procurement peers about how to push your department to the next level of performance.

 

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