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

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 eight 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, we learned what the CPO and the transition team tried to do to make the BPO business case work, plus we heard about the last-minute push by the CPO and his team to consider an alternative outsourcing model, which was ultimately denied. In today’s episode, the CPO walks 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.

CPO Insider: Episode 9 – The Tip of the Iceberg

Andrew Bartolini: So, refresh my memory – when did you sign the contract?

Chief Procurement Officer: We signed in month 21 of the project and started rolling towards ramp-up in month 22. That’s when we started preparing for “go-live.” Right around this time, the actual BPO provider team visited us and when they arrived, cultural issues became readily apparent. For example, we knew from their management that the team received a daily per diem for food and expenses that they could spend as they chose. If we supplied them lunch they’d eat it; however, if they had to buy their own lunch, they wouldn’t eat. So our team became concerned because they’re on site working all day but none of them were eating because they didn’t want to spend their per diem. So then, we had to call their managers and say, “We’re a little concerned, we don’t think they can be productive the whole day because they’re not eating. Would you please ask them to buy their own lunch?”

Also, some of their people were just not a good fit for the job. One of the guys on the team was supposed to be their expert in our existing ERP and procurement systems but when we talked to him, we found that he never actually used the ERP and wasn’t very savvy with eProcurement either. So we sent him home and told them, “Sorry, it’s not acceptable for you to bring someone over here who’s never even seen our system’s log-in screen.” His replacement gets here and spends the next two weeks going through an intense knowledge transfer to understand how we work, what we do, and so on.

AB: Seems like they oversold the first guy’s capabilities….

CPO: Yeah, that’s putting it lightly….  So, in month 22, we inform my staff of who would have a role going forward and who would not. Those that did not had to either find another job within the company or be terminated. So, that was painful. Luckily, we’ve got a great HR person who was successful in finding a large number of our employees alternative roles within the company. But unfortunately, we did have to terminate about 18 employees.

AB: Only 18? That’s pretty amazing considering the entire company is facing this huge outsourcing agenda. In fact, it doesn’t make any sense….. Anyway, it’s clear that you can’t save everybody’s position when you undertake an outsourcing project, but you minimized the pain, it seems. Were there any more hiccups while you onboarded the new BPO provider?

CPO: Yes. We hit a few bumps when the new BPO provider visited with the current group that was managing our AP and would soon be displaced. Since we had outsourced AP years ago, it is fair to say that we had no knowledge of how the existing BPO managed AP – what were their processes, SLAs, etc. This knowledge gap became shockingly and terribly obvious as we went through the transition and towards “go-live.” We could not tell the new team anything about what they should do or how they should do it. At the time, the current provider seemed liked they were cooperating, but we later found out that they were on a strict internal order of “don’t ask-don’t tell.” They would help if asked, but if the new team didn’t ask about something, the incumbent wouldn’t offer any guidance

AB: Well, I’m not sure that is surprising. They lost their AP business with you and did not win the new bid. So bend over backward to help a competitor? Not likely, at least not without an incentive.

CPO: Yeah – they were competitors and I would say that normally, competitor-to-competitor transitions don’t go particularly well. I think the incoming provider was prepared for this, but they did not have the smoothest transition. At the time, they said that the incumbent was cordial and everything went well. But in reality, the incumbent did not give them a very good knowledge transfer. Many of the workflows that we had outsourced from many, many years ago – how they impact invoices, what to do if a payment was mixed, how to transmit it to the bank, what happened if the bank rejected it, how to follow up with vendors, how to pay, how to flag vendors that had to be paid urgently, how to flag them in the system so that they actually got paid on time – none of that stuff was transmitted to them.

AB: Wow – that’s not helpful at all.

CPO: I know, right? So, to illustrate how this impacted us, we have electricity vendors, especially in foreign countries, that need to be paid in ten days. But even if they had submitted the invoice immediately, we would have a hard time paying it in ten days by the time it worked its way through the system. The incumbent had developed their own know-how to manage these issues that they didn’t share with the incoming BPO and as a result, we were late paying them. In the past, we had gotten very little noise from our vendors around invoicing and AP. That may be changing.

So, after 24 long months, on the first day of year 3 in the project, the new BPO went live with 25% of procured transactions and followed with another 25% in each of the next three weeks. AP followed one month later. And in month 27 of our big project, the new BPO was up and running and on their own.

As procurement transitions go, this one had fairly mild hiccups as the incoming and outgoing BPO providers onboarded and offboarded their duties. Still, there were some casualties among people and accounts, which are bound to happen during an outsourcing event. But as we will see in Episode 10, the challenges that befell this CPO, his procurement team, and the greater organization were just the tip of the iceberg. Strap yourselves in and don your life-preserver – we’re heading into rough waters.

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

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

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