Business Process Outsourcing and the Role of Procurement

By Guest Editor

March 14, 2017 at 4:36 PM

By Anisha Khushlani, Senior Consultant, GEP

Today, outsourcing is no longer a buyer-vendor relationship but a long-term partnership that is more than just cost-cutting. It helps bring about better business outcomes by leveraging high-end technology and other expert capabilities from the vendor. Thus, there’s been a shift from Business Process Outsourcing to Business Process Management. This shift has brought about a change in attitude where the end goal is to not negotiate the lowest prices, but create a win-win situation for the partners.

Some key trends in outsourcing include: 

  • Vendor consolidation. Multiple vendors are no longer the preferred choice. Companies are moving to a more centralized system and consolidating their supplier base.
  • Outsourcing is on its way to adopting cloud technology and Robotic Process Automation.
  • The expectation from service providers now is to provide an end-to-end solution for the client’s needs. Companies are looking for a full suite of services from vendors.
  • Due to the economic slowdown of traditional outsourcing destinations such as China, Brazil, Russia and India, new destinations such as Colombia and Sri Lanka are emerging. 

Reasons of Outsourcing and Types of Services Outsourced

Companies are outsourcing, on average, more than 50% of their products/services for several reasons, including:

  • Focusing on their core competencies while outsourcing less important processes/tasks. 
  • Lowering costs by outsourcing to a low-cost country. 
  • Accessing technology or resources not available within the company.
  • Having the flexibility to expand or downsize more easily.
  • Accessing new markets by choosing a supplier closer to the end customers.

The major services that are largely outsourced include Information Technology services (software design, computer services, etc.), Logistics and Distribution services and Business Process Outsourcing (back office activities, contract functions, HR departments, etc.)

Risks of Outsourcing

There are several risks associated with outsourcing, ranging from strategic risks such as determining whether to outsource, selection risks in evaluating the right set of potential suppliers and implementation and management risks. 

Some of the more crucial risks that pose a threat to outsourcing are: 

  • Cyber security. When working internationally, there is a high risk of security breaches or compromised intellectual property rights.
  • Failure to deliver. It is necessary to implement a contingency plan in case a vendor fails to deliver and exposes the company to high risk.
  • Noncompliance with government regulation. The entity in charge of vendor selection must ensure vendor compliance with industry requirements.
  • Other contract considerations. Managing risks with change related costs, risks with defining SLAs (Service Level Agreements) correctly and ensuring compliance with these service levels, etc. 

Role of Procurement in Risk Management

With numerous benefits to outsourcing, companies are dependent on suppliers more than ever before, thus exposing the company to a number of risks. Today, procurement’s role is not just ensuring best prices for the products and services sourced, but also managing supplier risk for the organization. Procurement can manage this risk in a number of ways: 

Rigorous supplier selection processes. This ensures the right supplier is selected based on the needs of the organization process. It is always a good practice to solicit bids from different suppliers and go through a tight selection process involving RFX, reference calls, onsite presentations/demos, etc.

Financial analysis. Reviewing the supplier’s financial statements to ensure the supplier’s business is profitable and the supplier is not at risk of insolvency. The larger the spend with the supplier, the more critical it is to assess the supplier’s financial health. 

Data security. Safeguarding the company from data breaches by putting non-disclosure and master agreements in place. The master agreement should have clauses around: 

  • Data ownership clearly gives the ownership of data to the company
  • Data security outlines rules, standards and policies with respect to data security, for the supplier to adhere to
  • Destruction of buyer data upon termination. 
  • Intellectual property gives all ownership of work developed during the agreement to the company.
  • Data-sharing agreement. Companies today have a dedicated data sharing agreement in place if any customer/personal identity information is shared with a vendor to protect data confidentiality.
  • Termination clause in case of any breaches caused by the supplier.
  • Business continuity. Supplier should adhere to a commercially reasonable data backup policy. It’s good practice to include SLAs in the contract that set minimum targets for the supplier to meet and ensure performance levels and mitigate supply disruptions. A penalty could be incorporated in case a service level falls short of the target.
  • No hidden costs. Ensuring the contract covers all possible costs in sourcing that product/service, including cost for additional services/resources required and has no scope for any hidden costs.
  • Change in ownership. The master agreement should safeguard the company’s rights in case there is a change in ownership of the supplier resulting from merger, acquisition, consolidation or otherwise.

These are some of the ways in which procurement can manage the risk of outsourcing to an external party and ensure smooth running of the company.

Anisha Khushalani.jpgAs a Senior Consultant at GEP, Anisha Khushlani is leading and delivering projects across procurement, specializing in the areas of supply market analysis and benchmarking, RFP development and execution, supplier evaluations, negotiations strategy and spend analytics. She has worked with Fortune 500 Auto, CPG and Biotech clients and has been involved in leading and executing sourcing projects across the IT category. She also has experience working on direct categories such as wire and cable harnesses.

 Prior to joining GEP, Khushlani worked at Kraft Foods (Mondelez International). Her responsibilities included benchmarking contract manufacturing working models, identifying opportunity levers and recommending prospective locations for contract manufacturing in India. She holds a Masters of Management degree from IIT Bombay, and a Bachelors Degree in Electronics and Communications Engineering from BITS – Pilani, Dubai.

Tags: purchasing Risk management Supply chain management Procurement sourcing business process outsourcing
Category: News Article

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