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.
Readers can find the first six 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 today’s episode, although the vendor selection had been made and a transition plan had been framed out, our conversation today pivots back to an earlier discovery about the original business plan and what the final projected ROI would be.
CPO Insider: Episode 7 – Our Dilbert Moment
Andrew Bartolini: Okay, let’s rewind a little. In month 21, after considering the three BPOs’ bids, you decided on one, inspected their operations, finalized the contract and prepared to move forward. You’re excited by the deal, but at the same time there’s still plenty of work that needs to be done.
Chief Procurement Officer: Yes … exactly. After we agreed to contract terms with the BPO, we started to build a final business case based on the inputs that the BPO provided to us as opposed to the very aggressive ones provided by our consultant at the direction of our executive team . So, we look at things like “savings that will roll over into the next year;” “one-time versus long-sustained savings;” “how many headcount they would need to have in every area;” “what our reductions would be;” and so on and so forth. So, in the meantime, to complicate this further, there’s a team that’s been appointed by the executive committee to manage this transition and ensure that we maintain service excellence. An executive is appointed to manage that team, and so, he comes in at the point where we do the first half of the business case to see what the actual benefits will be. And then we had a truly surreal meeting…. All of us who’ve been working in the corporate world for a while have had our “Dilbert moments,” I would say. But, you know, we have all of the data collected – the FA (the financial analyst working on the business case) brings it back, and we see that the outsourcing – the pure transactional outsourcing piece of it – is going to lose us money. We’re not showing any benefit from outsourcing our transactional outsourcing – our PO processing shows a negative NPV.
AB: I am speechless!
CPO: No, I am speechless. I am still speechless and livid. So the new leader comes in – and I mean, the poor guy was put in charge of it just two weeks before, and he used to be out at a plant, so he knows almost nothing about anything in this type of corporate setting. So, he says to my team that’s sitting there, “Well, a negative NPV should not stop us from doing this.” And I basically said, “Are you kidding me? We’re not in the business of cutting back our employees and outsourcing for the sake of losing money,” right?
CPO: I’m still angry about it. And he says, “Well, if you think that way, you don’t really care about process standardization. This is not about making the company money; this is about doing things more methodically, getting the processes clear; building greater accountability. It’s a quest for process excellence.”
AB: And you reply?
CPO: I said, “That may be all good but generally speaking, if we’re doing a business case, we would prefer that it made us some money.”
AB: Of course – no company would outsource their P2P operations with a plan to lose money. Why was there a negative NPV?
CPO: Because when the original business case was modeled, our consultant identified a huge number [Publisher's note: this number was redacted but it was huge and on the face of it absurdly so when taking into account the number of staff to be displaced.] as the source-to-pay outsourcing benefit that the executive committee signed off on and therefore committed that number to the board. The number included prevention, which we don’t typically include in a business case. So we have this gigantic NPV number that was put forth by our consultants and approved and now expected by all executives and our board. So we’re now tasked with trying to understand how the gap between the two cases is so huge.
AB: What did you find?
CPO: While we knew the final number and that the consultant had build a very aggressive case, what we only found out later was that they had modeled the average headcount cost to our company to be almost three times the actual amount, including benefits. But in reality, our buyers were entry-level positions; and some of them are even non-exempt, which means they swipe in/swipe out as hourly contractors. They had used our company’s average FTE cost and applied it to our buyer group. But actually our buyers don’t make that much. Also, many of the large groups of buyers are sitting in low-cost countries. Our buyers were not getting close to the average company salary. So, that was the first error that went towards the business case.
Then, even though the BPO’s employees were of a substantially lower cost, you had to put into the business case the transition charges, the fee that we would pay our existing BPO to get out of our contract because we were still in a contract with them for outsourced AP services. So when you load that on top of the business case, we’re comparing a relatively low cost set of employees – some in the US, and many abroad – versus a very, very low-cost set of BPO employees in India and other places. In some regions the BPO was actually paying its staff more than what we were paying our buyers. Net-net, significant savings were not to be had.
And, then the newly selected BPO estimated that many, many more headcount were needed to do the job properly – many more than what we had internally. We agreed with that to some extent because we agreed that we were not doing the buying in some instances, and that we could not support all P2P transactions because we did not have the headcount. So, people were not doing routine bidding, requisitions would come in and would just be converted because no one had the energy or effort to challenge people by asking, “Do you have three bids?” or, “Find an alternative supplier.” We were just keeping our heads above the water and managing the transactions without a lot of value added.
AB: Did the BPO, by coming in at a lower price, do a bit of a bait and switch by coming in with a much higher staffing count? Do you remember if the competitor BPO came in with the same kind of support numbers?
CPO: I don’t know if we ever got the details from the competitor with how many FTEs they would actually need for the entire transaction, so it is possible.
Surely, when organizations prepare to outsource a significant portion of their operations, they don’t expect to lose money or even just break even on the project. But as our readers will learn, this was just the latest in a series of missteps and misfortunes for this CPO and his team. Tune in next time to CPO Insider as we learn how this CPO tried to lobby the executive team to alter the outsourcing plan with a last ditch plan.