ICG Commerce CEO talks about the drivers, challenges, and best practices of outsourcing your procurement.

by Peggy Cope

Carl Guarino is a veteran of the outsourcing wars and a “recovering lawyer,” according to FAO Today publisher Jay Whitehead. During his 18-year tenure as executive vice president of SEI Investments—a global provider of outsourced asset management, investment processing, and investment operations solutions—Guarino expanded the company’s asset management division and led its drive into global markets, encouraging growth through joint ventures and acquisitions. He joined ICG Commerce in August 2006. Now, as CEO, he leads a seasoned management team in supporting customers in their initiatives to reduce costs and add value to their enterprises, while sustaining the continued growth and success of the company.

ICG was founded in 1992 as Purchasing Group Inc.; it was renamed as ICG Commerce in November 1999. The privately held company, headquartered near Philadelphia, maintains offices in other U.S. cities, as well as the U.K. and Germany. With more than 80 active customers and 125 sourcing and category experts worldwide, the ICG team manages more than $5 billion in spend across a wide range of categories.

ICG Commerce focuses on helping companies buy more effectively and efficiently in order to reduce costs in ways that are significant and ongoing. The types of spend ICG gets involved with fall into several categories, most commonly indirect, according to Guarino, which include, for example, IT, travel, shipping and transportation, and increasingly services such as temporary labor.

One of the biggest challenges in the procurement arena is something that Guarino said had surprised him: a lack of information and visibility that companies have when it comes to what they are spending. “Companies have put so much into their ERP platforms, it surprised me they don’t have more cohesive, robust information, something where they could press a button and it would spit out how much they spend on each vendor, a breakdown by factory … but
companies are still fragmented,” he said.

With multiple-platform technology come issues surrounding consistency and depth of information. Companies that have made acquisitions might not be fully integrated from an information standpoint, as well as a control standpoint. The procurement department doesn’t have its hands on all the big aspects of spend, according to Guarino. “Europe might be disconnected from the U.S., Division XYZ might not be fully integrated—plants and factories are doing a lot on their own, and there are areas that are siloed, like marketing. There are an awful lot of issues there.”

One of the fundamental things ICG Commerce does is give clients better visibility and control. The paradox of outsourcing is a knee-jerk reaction from executives who fear they will lose control. “But you only get control if you have good information,” Guarino noted. ICG provides information to help its customers make decisions intelligently, with all the information at their fingertips and knowledge of what the tradeoffs are.

In generating savings for his clients, Guarino says ICG looks less at procurement operating costs. Rather, he suggested, “Look at the spend that is being managed. A huge return on investment can be generated in this area.”

But there’s an inherent challenge and irony in reducing those costs: Once clients get a taste of the savings, they get “expectation inflation.” When that happens, what else can a provider give them to keep them coming back? “The name of the game is continuous improvement,” said Guarino. In procurement, when an organization has achieved savings of 20 percent off the company’s base, the executives turn around and ask what more they can save. “On the sourcing side, you can’t go back to vendors with a bigger baseball bat and get a better price,” said Guarino. “You need specialized knowledge in the category, you have to get new suppliers interested, or tap into low-cost sourcing in China.

Or you can look at the fact that not every company is optimizing its use of preferred suppliers.”

As one facet of overall F&A outsourcing, you have to wonder how procurement compares to the value propositions of other types of outsourcing. According to Guarino, you can get many times the amount of savings from procurement outsourcing that you get from other areas. In addition, procurement is increasingly being included in more multi-tower contracts. But how successful are suppliers at adding it to their sales?

Guarino says there is a growing awareness among buyers of the savings that can be realized from outsourcing procurement. “It’s where the bulk of spend is, if not people,” he noted. With that being said, many don’t understand the unique value proposition that lies in finding the best-of-breed provider in each category.

As the industry sees more shorter contracts being signed, companies realize how difficult it is to keep the flexibility they need and achieve a balance under a long contract that involves procurement. With that in mind, new contracts are not fixed; they are built to change. Three to five years is about as far as a company can go and stay flexible, Guarino noted. Change is inevitable.

And as F&A outsourcing continues to evolve, providers want to add procurement to larger, wrap-around deals, and ICG is a specialty provider in the BPO space. This begs the question of enterprise vs. best-of-breed solutions that target pure-play procurement.

“Clearly, I have a biased perspective,” Guarino admitted. But procurement outsourcing is of a different nature than IT, F&A, or HR outsourcing. The basic premise is that companies seek process efficiency and the ability to work effectively in lower cost country environments. The skill set that makes one effective at providing lower costs in other areas does not transcend to procurement. “Companies often see enough differences in those categories to go best-of-breed even in IT, F&A, and HR. Procurement is the best case for going best-of-breed because of the nature of the drivers and competencies, which are different in procurement than the other disciplines.”

The primary drivers encompass two or three things, noted Guarino. One is the financial driver, as companies look to save money. A strategy focusing on innovation is another. “Kimberly Clark is a good example of getting focused on core competencies. It doesn’t make sense to try to be world class in every area. Look to partner with whoever is world class in each area.” The third thing is a growing awareness regarding risk management information and control.

As companies recognize that they don’t have their hands fully around their spend, it becomes a Sarbanes-Oxley issue, said Guarino, and companies need to have better visibility of whom they are buying from and provide people with a better framework of the market and the tradeoffs, as well as why a particular buyer was selected. “You don’t want to have 50 people spread out across the country making independent decisions that are not monitored and controlled,” he said. Procurement outsourcing averts a dangerous situation from the Sarbox standpoint.

ICG is actively proselytizing about this point. “People still aren’t aware of the extent of their lack of knowledge. They don’t know what they don’t know, or that there are ways to solve that,” said Guarino. A little provider education can go a long way toward that goal, and growing awareness and focus continue to drive outsourcing.

Guarino had some advice to offer buyers in closing: “Don’t ignore this area of procurement,” he said. “Make sure you understand the different value proposition. The focus is not on headcount; it needs to be on spend or savings. Drill down with suppliers into their specialized capabilities to get the best answers.”

In addition, he recommended the use of sourcing advisors in making decisions about procurement outsourcing. “The category is not well established or developed, so advisors have a role to play in helping clients know what to expect or what they can get. It makes them more brave in picking a supplier.” Since ICG competes against large BPO companies, an advisor might tell a potential client to dig deeper into specific capabilities. “I think they are helping our business, to expand and broaden the capabilities,” he said.