How IT Affects Changes in the Procurement Area
By Viet Ho, CPO, Russell Investments
Spurred by technology advances and a lower cost delivery model, outsourcing of IT functions across various industries continues unabated. Many IT resources find themselves assuming dual responsibilities for technical subject matter expertise and supplier management - with supplier management being an evolving new role.
Suppliers also find themselves taking on more end-to-end responsibilities in Managed Services Models, which include both service delivery and program management. In many cases, suppliers are placed in positions of control for end-to-end processes. As a natural consequence, many suppliers have more autonomy and are self-incentivized to drive process improvements.
“As IT evolves to become a major client of the Procurement area, Procurement must be ready to transform itself to become a supportive IT partner”
Increasingly, companies are realizing that the success of an outsourcing program lies largely on their supplier management. But an inherent challenge exists. A close relationship with suppliers is generally beneficial for day-to-day operations. Too close of a supplier relationship will affect objectivity and potentially, breeds ineffective supplier management. Fulfilling contract obligations or Key Performance Indicators (KPIs) may then, be at risk.
There is certainly a growing awareness that good governance can make or break an outsourcing deal. Organizations can significantly reduce risk by understanding and adequately enforcing key aspects of supplier governance will significantly reduce risks. Effective governance can stop value leakage and improve outcomes. Supplier management has become an increasingly important function in the governance model although many organizations continue to under-invest in this critical activity.
Involving the Procurement group in this critical governance role, can be a solution to this challenge. The CIO can be well served with a strong, capable, and independent Procurement partner to play the “bad guy” role in supplier management. In particular, Procurement can help to manage supplier risk across the enterprise since they are working across the organization with other categories such as HR, marketing, legal, operations and manufacturing,
The Procurement group can rise to the challenge by transforming itself in three key areas.
Recruit, develop, and retain the right people
• Recruit business oriented people with strong soft skills who can operate across multiple disciplines and develop strong relationship with IT stakeholders.
• Implement a program to train existing staff with the right skills to be able to operate in the new collaborative environment. Training needs to include supplier management playbook training, analytical assessment, business case development and soft-skill training e.g. presentation, facilitation, conflict management, emotional intelligence.
•Develop good career paths through supplier management track and present interesting strategic opportunities to retain and motivate Procurement staff.
Develop and implement strong processes, including risk management
•Develop a strong governance model with defined roles and responsibilities between the firm’s management structure and suppliers. Escalation paths should be clearly defined with specific contacts documented.
•Drive the agendas for Quarterly Business Reviews as opposed to relying on supplier-led status updates. Ensure that performance issues are raised and addressed. QBR (too often supplier managers sit quietly through QBRs where suppliers report all the good news and the status is all green, while there are performance issues with those particular suppliers
•Segment suppliers into Tier 1 and Tier 2 to provide appropriate focus on the critical suppliers. In most cases, because management of Tier 1 suppliers requires significantly more effort, Tier 1 should be limited to 5-10 suppliers. Implement a periodic supplier auditing process. Annual site visits to Tier 1 suppliers should be included to ensure compliance.
•Ensure there are sufficient contracting languages to protect the firm’s data and systems. Also, a robust business continuity plan should be in place.
•Evaluate and manage supplier risk at the Statement of Work, order or contract amendment level i.e. evaluate supplier risk by each SOW and not just at the supplier level.
Since there will be examples when you can unknowingly give high-risk work to low risk suppliers, therefore inadvertently making them high risk without the appropriate evaluation Manage financial risk is an area that Procurement had demonstrated successes: My procurement teams have taken on the management of invoices for selected suppliers (telecom, data, software, hardware) on behalf of the IT department. Procurement teams have been able to apply their knowledge to the contracts to make sure invoices are accurate. Historically we have discovered inaccurate and duplicate invoice, from my experiences there were some suppliers have an error rate in the 40-50 percent range. For this service instead of asking senior IT service managers (manager/director level) to review 500-1000 pages of invoices against 10 different contracts per month, we relied on a handful analyst to review and validate invoices against inventories and performance levels.
Develop supplier management playbooks and train the Procurement team to monitor consistent high quality and service delivery against the playbook.
Assess current Procurement services and determine any service realignment necessary to meet the needs of the CIO and IT. For example, able to expand capacity without increasing headcount by reducing “bad busy” work and increasing “good busy” work.
Leverage on Procurement technology
To efficiently manage suppliers, Procurement needs enabling technology including:
Procure-to-Pay system, e.g. Ariba or Coupa, can be used to efficiently match purchase orders with invoices.
Risk management tools, e.g. Hiperos or Bravo, can manage risk at the transaction level.
As IT evolves to become a major client of the Procurement area, Procurement must be ready to transform itself to become a supportive IT partner. Procurement will need to realign its services to provide the necessary bandwidth and produce consistent and high-quality service level to ensure a trusted relationship is achieved. Procurement will need to develop stronger capabilities in the supplier management area to support the expanding needs of IT. This will require strong sponsorship from the CIO and CPO to ensure a successful implementation. The CIO and the CPO play pivotal roles to closely collaborate and cement relationships between their respective IT and Procurement areas.