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CPO Insider: Procurement Outsourcing (Episode 10) – Fast & Furious

In many ways, our upcoming event, The CPO Rising 2016 Summit, 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.Readers can find the first nine episodes here and get caught up on what has become an insightful and instructive real world case study focused on outsourcing the procurement function.

In our last episode, the CPO walked us through his organization’s transition period, including cultural issues, employee terminations, and a less-than-smooth hand off of responsibilities from the outgoing BPO provider to the incoming provider. In today’s episode, our CPO walks us through more headaches, miscommunications, and mismanagement of what has become a tale of procurement (and AP) outsourcing gone bad.

CPO Insider: Episode 10 – Fast and Furious

Andrew Bartolini: OK, so let’s look at what happened when full AP outsourcing went live?

Chief Procurement Officer: We go live with AP outsourcing and don’t hear anything from the provider for a little while. Then, gradually it started hitting the fan and just kept on coming and coming – payments weren’t made, vendors started complaining, then more vendors complained, then more vendors complained more and more. The provider couldn’t get, what seemed to us as, very simple transactions right. For example, they couldn’t convert kilos to metric tons and vice versa. For context, we buy per kilo load and it comes in tons. They didn’t know how to convert that. Now, you can say to yourselves, “Hell, just Google it!” But they don’t work like that and as a result, they continuously got the units of measure incorrect. They didn’t get it right to start and didn’t understand how to reverse transactions. It was shocking that they didn’t understand the consequence of incorrect transactions in our accounting systems.

To give you a clearer idea of the impact, if we order a thousand metric tons of some commodity, they actually asked us, “Well, does it really matter if it’s a thousand metric tons or a hundred metric tons, because we’ve paid the right amount?” And we said, “Well, yeah, it really does matter because if you’ve got a thousand metric tons in your warehouse, it’s very different from having a hundred metric tons.” And they were like, “Yeah, but we paid out $2.3 million accurately, we just missed a zero.” Our response to that was, “Actually, it really does matter, and you really need to get quantity right because otherwise our inventories are haywire. The plants’ accountants were going crazy because they couldn’t get basic transactions right. So the problems came fast and our suppliers and stakeholders became furious.

AB:Fast and Furious,” but no Vin Diesel. I mean, who wouldn’t go crazy with this? Of course it matters – understand and then do your job!

CPO: Right! But we had a fault, as well, which turned out to be a serious one, actually, we had many faults. One big issue was that we had not designed the escalation process for the outsourcing provider correctly. What we should have done was keep the initial escalations within the BPO provider: first with a team leader, then to the operations floor leader, and so forth. Instead, the BPO staff came directly to us for almost every issue, and there were many, asking us what to do. This resulted in many of our high-level procurement team members getting called in to work through very basic invoice issues, because we had no AP resources internally.

AB: Not good.

CPO: No, definitely not good. Unbeknownst to many of us, our plants had very complex rules and systems so there were many wrong transactions but even after we identified the mistakes, it was very difficult to unwind them and our provider’s staff didn’t understand any of it. They didn’t understand the underlying problem, they didn’t understand what they had done wrong and they had no idea how to unbook them and it was very, very time consuming for me and my team.

Then, procurement transactions started to go wrong. So, purchase orders (POs) weren’t issued, or they were issued to the wrong vendor, or they contacted the vendor directly and the vendor had no idea that we’d outsourced our processes.

By the way, we had thought about doing a mass communication with the vendors to say that we’d outsourced activities but then we remembered the pesky circumstances in a good portion of our contracts, that we had set a confidentiality clause where we are not permitted to provide vendor pricing to any other third party, which is a very reasonable clause in a contract. So, we would have inherently violated the confidentiality clause in the contract by outsourcing to the BPO. Now, maybe the vendor wouldn’t have minded, but we debated long and hard about how we would inform our vendor community, and then we just decided that we couldn’t really inform them because if we did, they could come back to us and say, “You know what? You’re breaking our contract.”

AB: Hmm, another wrinkle.

CPO: So, we just thought, “Maybe we if ignore the whole thing, maybe vendors won’t complain too much about it.” But we were worried that if we were too explicit about it, our suppliers would come back to us, and then how could we begin to renegotiate all of those contracts?

AB: Not with the much smaller team, you don’t have the staff.

CPO: Right! So, we entered into this surreal period where we got tons and tons of complaints from suppliers – whether they’re payment or order confirmation complaints. We realized only afterwards that part of the issue was that all of these complaints were coming to us and all of our stakeholders when the provider screwed something up.

The outsourcing provider didn’t seem to have any common sense. For example, when they’d have an urgent invoice that needed approval, and they’re on a timeline to approve it, they would email the person, and within an hour they would email them again. Then, they would instant message them every five minutes, like, “Confirm it. Confirm it. Confirm it. Confirm it.” There was a lack of urgency in some areas, but undue urgency in other areas where people cannot be expected to drop everything and to approve an invoice. Of course not, but they would do it within a day. There didn’t seem to be any rhyme or reason to how the provider communicated or engaged with stakeholders.

Also, every BPO staffer that touched a PO acted like it was a completely new order. They didn’t know or reference the history of work done earlier in the process by their team: what had been done, who they had talked to, etc. Somehow, that history didn’t stick with each PO. And so, a person would get asked the same question by multiple people on the BPO team. We also experienced many language and communication issues. I experienced one when I was asked to approve an invoice. The first email came in from one staffer, “Hi! You need to approve X, Y or Z.” The second one came in, “Hi [CPO's last name], why can’t you approve X, Y or Z?” The third one came in, “Dear [misspelled CPO's last name],” and the last one, “[CPO's first name]!” So they didn’t know what names they should use [laughs], which is a small thing, but it was just basic writing skills. They would write an email and no one could understand exactly what they were saying. We didn’t understand them on the telephone when they called and then we could not understand them in email. Our business stakeholders fared even worse.

AB: Man, that sounds frustrating! Please tell me it gets better….

CPO: It certainly was. Let me say this – I’m so glad to be sharing our story with your readers, Andrew. I hope they can learn from our mistakes.

One would like to think that the problems that this CPO and his staff had with the incoming BPO provider during and after go-live would have subsided after a “breaking in” period. One would like to think…….. Join us one last time for the final installment in this CPO Serial series, to find out whether or not that was the case.

RELATED ARTICLES

CPO Insider: Procurement Outsourcing (Episode 9) – The Tip of the Iceberg

CPO Insider: Procurement Outsourcing (Episode 8) – Hail Mary

CPO Insider: Procurement Outsourcing (Episode 7) – Our Dilbert Moment

CPO Insider: Procurement Outsourcing (Episode 6) – The Rubber Hits the Road

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

CPO Insider: Procurement Outsourcing (Episode 4) – The RFP

CPO Insider: Procurement Outsourcing (Episode 3) – The Counterproposal

CPO Insider: Procurement Outsourcing (Episode 2) – A Business Case is Made

CPO Insider: Procurement Outsourcing (Episode I) – It Begins

 

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