Our view on BPO Procurement

Ton van Dolder & Stefan Westdijk

December 2008
Table of content

BPO Procurement

The Global Sourcing Strategies model

The Procurement Deep Dive tool

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 What is BPO Procurement all about…

Indirect procurement (also referred to as) - indirect materials, non-core procurement, non-
strategic sourcing/procurement, GNFR - goods not for resale, NPM - non production
materials, NPR – non-product related …

Full Service (S2C+P2P) source to settlement - outsourcing exclusively the management of all or
selected indirect spend categories and the transactional processing (P2P) activities

Sourcing (S2C) - outsourcing exclusively the management of all or selected indirect spend
categories

Procure to Pay (P2P), Operational procurement, transaction processing across indirect & direct
categories

Direct procurement (also referred to as) - direct materials, core-procurement, strategic

sourcing/procurement, GFR - goods for resale, PM - production materials…

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 How do we define BPO Procurement?

Supplier Spend
Tactical & Supplier Intelligence Intelligence
Strategic Support Management Purchase to Pay
Process

Market analysis &

benchmarking

Fulfilment

Category Spend
Management Non-Compliance Inventory
Analysis Management
Invoice matching
eSourcing Factory and payment

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 BPO-P – Portfolio

BPO Procurement
Management Governance

Functions
Value Creation
Source to Contract (S2C) Procure to Pay (P2P)
Managing, prioritising & contracting expenditure on behalf Managing, enhancing & driving efficiency in the requisition
of the client for outsourced categories of spend through payment process

Focus Improved Effectiveness Improved Efficiency

€ / $ / £ Scale Hundreds of Millions Per Year Tens of Millions Per Year
Cost of Capital, Leveraged Assets, Cost
Levers Strategic Sourcing, Value Stream Analysis, Tax Reduction
Avoidance, Quality
Labour Arbitrage, Improved Compliance, Productivity

Key Elements Category Knowledge & Expertise Spend Analysis Rightshore (Distributed Delivery)

Proven Methodologies Help Desk Buying Channel Management

Spend Aggregation Risk Management Compliance Management

Strategic Sourcing Sustainable Development Supplier Management

Spot Buying Continuous Improvement AP / Disbursements

Technology
Enablers
Spend Analysis & Business Intelligence
e-Sourcing Web Based Methods
Compliance Tools
e-Procurement

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Example of the spread of activities between the outsourcing partner and
the own organisation
Reporting
Purchase to pay
• Monitor
• Transaction compliance
Outsourced

• Management • Exception
Supplier • Monitor • Management
management compliance
Project planning Strategic sourcing • Requisition
• Define service • Requisition support
levels support
• Purchasing • Commodity • P2P reporting
strategy Criteria profiling • Service level • Invoice settlement
reporting • Manage inventory
• Savings • Market and • Manage account
identification supplier research • Supplier Adoption • Levels
• Payable
• Define • Bid preparation • Prepared contract • Expedite
communication evaluations • Manage payments
to suppliers

• Strategic planning • Commodity • Contract • Requisitions

specifications evaluation
• Sign off strategy meetings with • PO approval
Owned

• Supplier selection suppliers

• Negotiation
• Contract
finalisation

Source to contract Purchase to pay

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How are you going to decide what to outsource?

• Look at both processes and spend (transacting and sourcing)

• Review your resource pool, do you struggle for resource in certain categories and
or countries?
• Is there a change program in place?
• Do you have aggressive savings targets?
• How robust is your operational and transactional infrastructure?
• Do you have compliance issues and find it hard to enforce policy?
• Is there categories you are not fully addressing or have been taken as far as they
can be?
• Will the outputs be large enough to register on the board‟s radar?

What is your Sourcing Strategy?

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Table of content

BPO Procurement

The Global Sourcing Strategies model

The Procurement Deep Dive tool

8
Sourcing strategies

What is sourcing?
Sourcing is delegating business functions to a separate business unit or third party.

What is a sourcing strategy?

A sourcing strategy is about defining what an organisation wants to do with tasks,
functions or processes that are not differentiating the organisation from its
competitors.

Why do you need a good sourcing strategy?

1 To make the right sourcing decision

2 To deliver the expected value

3 To provide guidance on the execution

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Introduction to our Approach

The definition, execution and evaluation of a sourcing strategy is a continuous process.

Due to the changing internal and external environment, the sourcing strategy can
change over time. Therefore, a closed loop process is developed as visualized below.
Each step contains several activities and deliverables which will support you to develop
a sourcing strategy that fits your organisation and your organisation‟s environment.

Analysis and
Definition

Scenario
Delivery or Planning and
Operations Business
Case
External External
Forces Internal Forces
Forces

Transition or
Selection and
Migration
Preparation

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The Analysis and Definition phase results in a well-considered sourcing
strategy using the GSS model as an Executive Decision Support tool

Analysis and
Definition

Scenario
Delivery or Planning and
Operations Business
Case

Transition or
Selection and
Migration
Preparation

Deliverables Requirements/Needs
• Check on suitability of sourcing opportunity • Vision on process/function to be sourced
• Insight in different sourcing modes, high-level • Multidisciplinary team
benefits and the background of sourcing strategies • Involvement of corporate management
• Current state analysis • GSS model
• Benchmark data
• Sourcing vision and strategy
• A detailed plan of approach
• Actor and impact assessment
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The Sourcing Decision & Capgemini’s Research

Companies and public sector organisations can achieve significant performance

improvement through effective Global Sourcing of Services (GSS) but face a number of
daunting choices including:

 Whether to outsource or source in-house

 Whether to source onshore or offshore
 Which countries and providers to source from
 How to manage relationships with providers.

Our research shows that sourcing decisions made on a tactical basis under-achieve as
they tend to focus on short-term cost reduction.

Derived from extensive and original research the GSS Model is designed to help
organisations make these sourcing decisions more effectively by providing a systematic
approach to diagnosing decision parameters.

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The Sourcing Decision & Capgemini’s Research
The development of our Global Sourcing of Services Model has been driven by a range
of different research points:
 A review of prior research, by other organisations and by academics
 Extensive original research working with a number of major multinational
companies; all leaders in their industry. In addition we obtained advice from
European Outsourcing Associations
 Advice from two leading experts on global sourcing - Dr Phanish Puranam of the
London Business School and Professor Mari Sako of the Oxford Saïd Business
School as well as our own expert contacts
 Input from Capgemini subject matter experts
 The model derived has been validated by testing with the companies that
participated in the initial research

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There are key decisions in global sourcing concerning ownership (in-
house or outsourced), location (onshore or offshore) and management
style (tight or light)

Offshore

Location

Onshore Light
Management
Tight Style
In-house Outsourced
Ownership

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The decision model has eight Modes as summarized below with three-
letter codes for ease of reference

Ownership Location Relationship Label Management Style Code Mode Name

1 In-house ON-shore Close Family Light INL “Back of House”
2 In-house ON-shore Close Family Tight INT “Under the Nose”
3 In-house OFf-shore Extended Family Light IFL “Hand Over the Car Keys”
4 In-house OFf-shore Extended Family Tight IFT “Serve and Protect”
5 Outsourced ON-shore Friends Light ONL “Someone Else‟s Challenge”
6 Outsourced ON-shore Friends Tight ONT “Cohabitation”
7 Outsourced OFf-shore Acquaintances Light OFL “Move and Forget”
8 Outsourced OFf-shore Acquaintances Tight OFT “Gold Frequent Flyer”

Some service providers will require ongoing tight management while others can be
held at arms‟ length. There is clearly a trade-off between cost and risk.

15 1
These modes can also be characterized by names which are more
commonly used in the sourcing market today

Captive Offshore
(e.g. offshored SSC)
Spin off
(e.g. new company)

Shared Support organisation

(e.g. facility power house)

Horizontally outsourced
Offshore (e.g. BPO vendor)

Near shoring Vertically outsourced

(e.g. Managed Service Provider)
Onshore Light Management
Tight Management
Selective sourcing or multiple
sourcing is a combination of In-house Outsourced
various sourcing options
In house BPO vendor

Optimized in house solution

(e.g. in-house SSC)

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Our research suggests that there are five sets of Environmental
Characteristics that affect the choice of global Sourcing Mode

Organisation’s Service
Characteristics Characteristics

SOURCING
DECISION
Customer Competitor
Demand Characteristics
Characteristics

Supply Market
Characteristics

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The Model explained

CI
EV  PV  (  Pr)  CC
CM
 Expected Value (EV): expected value of each mode
 Potential Value (PV): potential savings from our research of ownership and location
 Cost Impact (CI): cost impact, potential cost of set up from our research of
ownership and location
 Collaboration Mode (CM): management style: takes a value of 1 for light and 2 for
tight; research shows tight management halves the cost impact
 Probability (Pr): of the costs being incurred, derived from answering the 30
questions; essentially (CI/CMxPr) represents the risk of incurring costs
 Cost of Collaboration (CC): probable cost of tight and light management for the
ownership and location impacts

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Further explanation of the components of the equation
Cost of Collaboration and Management (CC)

Although tighter collaboration reduces the cost impact, it also incurs its own cost.
From our review of existing and our own research, we have set the default costs of
collaboration as follows, with all costs as a percentage of the current total cost.

Sourcing Mode Additional Cost of Additional Cost of

Light Mgmt Tight Mgmt

In-house, Onshore (IN) 0% 3%

In-house, Offshore (IF) 1% 8%

Outsourced, Onshore (ON) 1% 5%

Outsourced, Offshore (OF) 2% 10%

Changing the sourcing mode and the management mode increases the cost of
collaboration or management, up to an additional 10% of base costs for the case of
outsourced, offshore and a tight management style.

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 Further explanation of Cost Impact calculation

 Cost of Impact for each cost category Cost Category Cost (% of current total cost of
(search and contract, restructuring providing same activity)

etc) is calculated for each question in High Low

the model based on whether the cost
is estimated to be high or low.
Search and 4% 0.02%
 The Sourcing Mode will affect Contract
whether the Cost of Impact is high or
Restructuring 5% 3%
low.
 The percentage costs for each cost
Process 10% 1%
category have been calculated using
Changes
Capgemini research with a number of
major multinational companies. They Transitioning 3% 2%
have been endorsed by Dr Phanish Work
Puranam of the London Business Lost Productivity 11% 3%
School who has completed extensive
research on this subject.
Governance 10% 6%

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Further explanation of Cost Impact calculation

When calculating Cost Impact for each question in the model the following baseline
assumptions have been applied in order to ensure consistency of calculation:

 The status quo is in house, on shore and light management

 Costs are high unless a legitimate explanation for cost being low is provided in the
stated question
 Governance costs are high for offshore solutions and low for onshore solutions
 Search and contract costs are assumed to be high for both outsourced options and
low for the in-house off shore option
 Costs fall the greater the level of supplier market maturity
 Restructuring costs are fixed high
 Target location for outsourced offshore and in house offshore is the same (and
hence supply market characteristics for staff, resources etc.) and
 All assumptions hold unless the question in the model indicates that the cost should
behave in a different way to that assumed above

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The Model has been discussed with and validated by many companies
and (semi-)public sector organisations

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GSS model – Look and Feel

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GSS model – Look and Feel

 For each of the 5 different

environmental
characteristics questions
are defined to analyse the
organisation‟s specific
situation
 Each question can be
answered at a five point
scale varying from „highly
disagree‟ to „highly agree‟
 The model supports the
possibility to adjust the
background parameters to
the specific client situation,
like the potential savings per
sourcing option

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A Case Study – GSS Model Input

Service Characteristics
Question: “Responsibility for performance of this process is clearly defined”
Answer:

Question: “Mistakes in this process will have a significant business impact from a legal,
regulatory or financial point of view”
Answer:

Question: “The process involves direct contact with the organisation‟s clients (e.g.
external clients, suppliers)”
Answer:

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A Case Study – GSS Model Input

Customer Demand Characteristics

Question: “Internal customers are more concerned about the cost of the service rather
than service excellence”
Answer:

Question: “The process in scope differentiates your organisation in its competitive

landscape”
Answer:

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A Case Study – GSS Model Input

Organisation Characteristics
Question: “In this specific process, most „generalist‟ employees are capable of
performing other employee‟s jobs‟”
Answer:

Question: “The organisation is evolving and requirements are changing quickly”

Answer:

Question: “There is potential for industrial unrest if jobs are lost”

Answer:

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A Case Study – GSS Model Input

Competitor Characteristics
Question: “Competitors are known for having distant relationships with their service
provider”
Answer:

Question: “Competitors of your organisation are off-shoring this service successfully”

Answer:

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A Case Study – GSS Model Input

Supply Market Characteristics

Question: “Labor attrition rate is low off shore”
Answer:

Question: “The supply market is able to provide this process at maintained service
levels at lower cost”
Answer:

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A Case Study – GSS Model Output

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A Case Study – GSS Model Output
Global Sourcing of Services model

Result Statements

Service Characteristics

Service is standardised and documented in procedures Service is heavily standardised and therefore can be easily provided by a third
party

Requirements for performing this process can be easily specified and Service is easily specified and can be effectively monitored which makes it a likely
effectively monitored candidate for consolidating and sourcing from a different provider

Mistakes in this process will have a significant business impact from a legal, Mistakes will not have a significant impact on business and therefore there is no
regulatory or financial point of view business risk in considering alternative sourcing solutions

The process involves direct contact with the organisation’s clients (e.g. The process involves direct contact with end customers. This adds complexity to
external clients, suppliers) the delivery of this service remotely. Any process failures will impact on customer
satisfaction.

The service can be delivered remotely without internal staff or customers’ The service can be delivered remotely and there is no need for involvement from
involvement internal staff or customers, making it a prime candidate for alternative sourcing
considerations

Process decision can be based on standard specified criteria Decisions can be easily made based on pre-determined criteria. This makes this
service a good candidate for alternative sourcing considerations

Responsibility for performance of this process is clearly defined Accountability is easily allocated and therefore the risk of outsourcing is low and the
service lends itself to outsourcing

Customer Demand Characteristics

Internal customers are convinced that outsourcing will be beneficial Buy-in exists within the organisation already and will ease the transition from a
change management perspective

Internal customers are more concerned about the cost of the service rather Service excellence is the main driver and therefore costs may increase as a result
than service excellence of trying to improve service levels e.g. more qualified staff, higher volume of staff

The process in scope has a significant brand impact The process has no significant brand impact. Adequate process performance
needs to be established at the lowest cost.

The process in scope differentiates your organisation in its competitive This process does not differentiate the client in its markets. It is therefore possible
landscape to minimise the cost of service delivery with no brand risk.

Global Sourcing of Services model

Results Summary

SourceModeDescription SourceModeAnalogy AverageEV AverageRank RankofAverageEV RankofAverageRank

Outsourced, Off Shore, Light Management Move and Forget 19,3 1,8 1 1
Outsourced, Off Shore, Tight Management Gold Frequent Flyer 18,1 2,3 2 2
In House, Off Shore, Light Management Hand Over the Car Keys 17,2 2,9 3 3
In House, Off Shore, Tight Management Serve and Protect 16,1 3,5 4 4
Outsourced, On Shore, Tight Management Cohabitation 8,7 5,4 5 5
Outsourced, On Shore, Light Management Someone Else's Problem 6,3 6 6 6
In House, On Shore, Light Management Back of House 0 6,5 7 7
In House, On Shore, Tight Management Under my Nose -3 7,6 8 8

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Table of content

BPO Procurement

The Global Sourcing Strategies model

The Procurement Deep Dive tool

32
The deep dive is being developed as a tool specifically to support
Procurement Sourcing decisions

• Many organizations struggle to define a sourcing strategy for their business

function(s) that fits their specific organization elements and environment.

• Also in the procurement function it is not totally clear what needs to be

considered when defining a sourcing strategy.

• The procurement deep dive is developed in order to give organizations insight

in the related elements and to help defining a sourcing strategy that fits the
organization.

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Our Procurement research suggests that there are six sets of
environmental characteristics that affect the choice of global sourcing
mode

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Introduction to the Procurement Deep Dive

35
Insert
General Information

36
Insert
Organizational Characteristics

37
Insert
Procurement Characteristics

38
Insert
Category Characteristics

39
Insert
Customer Demand Characteristics

40
Insert
Supply Market Characteristics

41
Insert
Competitor Characteristics

42
Insert
A working example outcome of the Procurement deep dive

43
Insert