Which way do you like to outsource your procurement: On its own, or together with finance and accounting?

by Rachael Stormonth

After a quieter period than had been envisaged for much of 2007, there was a slight pick-up in procurement BPO contract signings at the end of the year, and there has been further new activity in 2008. Some of these were extensions—for example. Unilever’s with IBM, expanding into the company’s Latin American procurement operations—or renewals—such as Cameron and Greif with ICG Commerce—but there have also been some new contract signings, some of which will be discussed below.

There has been some debate in other columns in FAO Today as to whether indirect procurement should be considered for outsourcing at the same time as F&A and, if so, to the same vendor. This columnist has always held a cautious view about the likelihood of organizations outsourcing procurement and also finance and accounting (F&A) to a single service provider, and there is now enough evidence from recent market activity to indicate patterns in buying behavior.

In terms of attitude, organizations surveyed by NelsonHall have more often than not stated that, if there were to consider outsourcing back-office functions, in principle they would not be averse to outsourcing both indirect procurement and F&A to the same external services provider. However, when sourcing of indirect goods and services is among the activities under consideration for outsourcing, then it is often a separate initiative from outsourcing accounts payable, which typically reports to a different management chain (CFO) than procurement. In addition to having different decision makers in procurement and F&A outsourcing initiatives, the internal politics within an organization might also contribute to the selection of different partners.

The approach may be unified if the decision to outsource F&A has already been made; in these situations outsourcing procurement transaction processing activities might also be included for consideration.

In the past few years there have been occasions when an organization has sought to outsource two or three back-office towers (HR, F&A, procurement) at the same time. Some larger vendors, most notably Accenture, are targeting these large multi-tower opportunities, looking to win deals where they take over management of selected F&A and/or HR processes, as well as procurement.

So what has been the market response to this approach?

The evidence in major contract awards in recent years is that when an organization has decided to outsource several back-office functions at the same time,
it tends to multi-source, awarding separate contracts to different vendors for each tower.

Kimberly-Clark (K-C) is a great example of a company that decided to outsource all its back-office functions as part of a competitive improvement initiative first announced in July 2005. In January 2007 it became public that K-C had outsourced its HR to Accenture, its F&A to Genpact, and indirect procurement to ICG Commerce. K-C thus selected specialist providers to support each of its back-office functions rather than use a single vendor.

Having won separate deals with K-C, Genpact and ICG Commerce were encouraged by the client to work together, and when an opportunity arose later in the year with car rental company Hertz, they pursued it jointly. Hertz awarded ICG Commerce a five-year indirect procurement BPO contract for services including sourcing, category management and transaction management for Hertz’s North American and European operations. Genpact is to provide procurement processing services in Europe on a subcontractor basis. In terms of their offerings, the two vendors complement each other well: ICG Commerce contributes sourcing and category management expertise and Genpact the transaction processing capabilities. This partnership potentially offers a strong alternative to IBM and Accenture. Interestingly, Hertz has concurrently awarded ACS a contract for learning services and IBM a five-year IT outsourcing contract.

So why does the market appear to prefer to multi-source? When these multi-tower “big deal” outsourced opportunities do arise, any vendor bidding for more than one tower must absolutely have to score at “best of breed” levels in each of the towers to win the business. Quite simply, this apparently has not been the case. Secondly, part of the value proposition for having a single vendor provide services across F&A and procurement relates to synergies in the services, and the ensuing efficiencies should translate into lower pricing: again, this does not appear to have been the case. Thirdly, organizations may have some emotional resistance to being dependent on just one service provider.

Of course, there are exceptions. The most obvious ones are the North American utilities that outsourced all their noncore functions in the early 2000s. One example is Canadian utility BC Hydro, which in 2002 awarded Accenture a major BPO contract whereby Accenture created a new unit employing approximately former 2,000 former BC Hydro employees. Much of this activity is related to customer management services, but it also includes IT, HR, F&A, and procurement services. In addition, the new entity was set up to offer these services to the wider utility community in that region.

Another example is U.S. utility NiSource, which in 2005 awarded IBM Global Services a 10-year, $1.6 billion multi-process BPO contract. The contract involved the transfer of more than 570 personnel to IBM and its subcontractors, and a further 445 positions were eliminated. The processes supported by IBM include elements within HR, F&A, procurement, customer contact services, billing and collections, and IT.

However, these examples are fundamentally different from the K-C and Hertz deals in that they are truly “transformational” outsourcing contracts, involving the setting up of a new entity that is intended to serve other organizations as well as the client. The decision made in the first place was not to outsource specific towers, be they procurement, F&A, or HR, but to radically change the whole business model.

There has also been activity of this type in the U.K. local government sector. In March 2008 a consortium led by IBM Global Services was awarded preferred bidder status for a 10-year £400 million ($800 million) multi-service BPO contract by Somerset County Council and Taunton Dean Borough Council. IBM GS and both authorities are forming a joint venture based in Taunton, Somerset, with Mouchel as a subcontractor. The services offered by the JV include HR, F&A, procurement, and customer services. It is anticipated that the contract will be signed in June 2008. Here again, the work of the JV partnership is looking to expand to provide similar services to other authorities in the southwest of England, and a contract has already been signed with a local police force.

In summary, therefore, when organizations choose to outsource procurement alongside other back-office towers, the preference to date appears to be to adopt a “best-of-breed” approach. This is not the case when all support functions, including call-center services and IT, are involved in a major transformational contract that is typified by involving the transfer of large numbers of personnel and the creation of a new entity.

Of course, this trend may very well change. The fact will remain, however, that any vendor bidding for a procurement BPO contract should be able to clearly articulate how they will deliver the service, offer competitive pricing, and provide solid client references. This should be self-evident, yet oddly enough some major vendors still appear to be struggling with these basic selection criteria. FAO