Published 7 May 2020
Today’s Reality: A Rise In Large-Scale Vendor Outsourcing
Astute IT talk about why there is a large increase in outsourcing to third-party vendors in today's digital age.
This the final part of this series, where you can find the full article below.
With spend aggregation across your vendor portfolio, the procurement office always has the opportunity to deliver increasing value-add to grow and support the business. Through this action, the SRM function can generate improved services from better vendor relationships, introduce stronger contractual agreements, all while ultimately optimising costs.
Vendor spend aggregation is the ability to consolidate and optimise the costs generated and invested into the vendor portfolios of an organisation. This gives the procurement department the power to further develop their cost efficiencies, and grow financially stronger as a company, whilst also allowing them to gain better insight and control of the vendor relations in which are of most importance. This is key in allowing supplier relationship managers to substantially increase the capabilities of managing, reviewing and taking action upon specific vendor relations. This all adds benefits when upholding more value and increasing the finances spent across the supply chains managed on a daily basis by your team.
But sometimes, many in the procurement department can have questionable doubts surrounding the idea of spend aggregation:
You may be looking to introduce spend aggregation across a wide range of both internal (departmental groups with the organisation) and external (contracted third-parties) suppliers. But this does not change the enablers which determine the value you gain from your spend-optimising proposition.
You could also just be looking to improve your cost base and exceed your targets of value, or equally as important for your strategic alignment, trying to combine the spend between your organisation and another you have recently acquired; spend aggregation can be beneficial for all industries. In addition, spend aggregation can pave the way for more efficient gains of any value propositions that may be appealing to your organisation.
We have seen many cases of people struggling to enable spend aggregation and maintain value across the procurement office, but there are many solutions to tackle this problem and we have the ideology here to support you in doing so. If you are leading projects to enable spend aggregation, you need the full attention of your key stakeholders and leadership team, so what should be your action points to ensure you get their support?
In order to ensure you begin to get the support of your hierarchy, it is essential you make as many, if not all, of the executive board aware of the benefits and outcomes to enabling spend aggregation. This could be the CPO, CFO, COO, CIO or the CEO. This is because they have the authority to make decisions on what is best for the company and influencing their decisions will boost your chances of building a proposition for the values your company could gain from this initiative.
Having the right authorities involved may bring a different proportion of views on the decisions, but at least that way no one can retaliate and go against the proposition. It may also take some influence of a number of C-Level roles to ensure willingness and enthusiasm to enrol the valuable process. Therefore, the weight may be heavier than others in terms of those that are willing, and those that are uncertain or completely against it. This makes it even more important to centralise the idea to all involved in decision-making, take on board everyone’s views and use the benefits of spend aggregation to your advantage over the potential consequences.
One of the toughest challenges the procurement office can face when trying to aggregate their spend sufficiently, is when all the data and information based upon the vendor portfolio is disorganised and scattered across an array of different areas. This can range between being stored in a randomised set of excel sheets, email audit trails and storage drives, as well as complex systems which make tracking of the data difficult. If you do not have an overall view of your company’s spend across each of your vendors, along with an audit trail showing confirmation of these running costs contracted, the ability to have control over those costs and build value upon those costs with vendors will be lost.
In terms of the invoices and purchase orders you have in place with these vendors, you must have a link between the access to these accounts payable to your relations and the centralised platform you store vendor portfolios and contractual agreements within. A great example would be to know what purchase orders have been put in place, and those that are outstanding to be paid for each vendor category you obtain, which can be set out across the audit trail and across reviews with your vendors.
All of this information needs to be informative and communicated regularly to maintain trust across your vendors. In summary, the need for a central platform for all of your vendors, which is secure enough to withstand any sort of attack. This can then allow you to create reports, queries and analysis based on agreements, discussions and review meetings with your vendors which surround the topic of financial cost management. You can then start to enhance the idea of achieving better value for money with the detailed insights from communications with your vendors, knowing exactly what you are paying for in alignment with the contract negotiations.
In order to ensure sufficient well-being and healthy continuity of your business, it is important to always consider the vendor across the contract lifecycle, rather than squashing everything into the benefits for the business against your vendor portfolio.
As they can be considered a trusted partner, and loyal to your business’s strategic aims through long-term mutual agreements, it is important to ensure that you continue your trust in them and begin to involve them more often in order to appreciate and strengthen the brilliant relations you may already have with those vendors. Therefore, those that have delivered exceptional results benefiting the growth and operative capabilities of your company should also be acknowledged across your spend aggregation efforts.
So in order to strengthen relations where it matters most to the strategic growth of the business, it should be considered to put in place a vendor selection and consolidation program. Not only will this help to achieve success in optimising your spend with the most effective contributors to the business, but also helps to strengthen your relations and potentially add to the improved value from focusing on these key vendors. Purchasing in bulk with the selected vendors rather than facing the distribution of spend across a wide range of vendors with the same outcomes will allow you to grow further business-to-business bonds and lower costs substantially, whether this is through reward or loyalty.
In order to ensure you keep the aggregation of spend in alignment with your targets, you should always consider setting up policies and procedures in which ensures people are optimising the spend effectively and prevent breach of spend which could potentially damage your value. This can include being done across the internal departments so people know what exactly they can spend on, including permissions, whilst also ensuring you are able to financially protect the purchasing orders and invoices which are owned to your vendors.
All of this will prevent ‘rogue spending’ behaviour, which refers to a company or employee purchase which does not meet the purchasing policies of other third-parties or areas of a large organisation. This compliance and governance can be seen as a strategically good aspect for your organisation in many ways. First of all, it can prevent you from being undermined by third-party vendors, tackling damage to your reputation by showing you are in control of your spend, preventing your program from crumbling or causing costs towards your relations also. The establishment of these firm controls which must be strictly complied against also can be enhanced by initiating centralised control over the authorisation of purchase orders, and therefore prevent the risk of any reckless and unthought payments from being made to your vendors.
In extreme cases, you can also make rogue buying and similar behaviour a condition of employment. Not only just this show strict compliance towards the standards of payments going out of the business, but it also prevents any other challenges you may face from disgruntled or mismanaged employees trying to attempt to use the organisation’s income for unsuitable payments elsewhere, which are not related to the company.
In order to effectively manage and emphasise value across the company’s expenses, it is important to be able to collaborate and be transparent with your SRM team and the vendors they take ownership of. Rules, supplier relationships and conditions pf the spend have to be accounted for when communicating internally to discuss the expenses your leadership team wish to commit towards external services or products. Without doing this, you put your spend aggregation program in jeopardy, just swooping in and not bothering to negotiate spend across selected suppliers will not work.
That is why in pulling together the strategic spend and final decisions, you need to have a collaborative solution where you can track and finalise reviews between your team in order to know what your spend is ready to negotiate with future or current suppliers. This includes the collaborative work of analysing key performance indicators of your current vendors, market intelligence of potential future vendors, and consistent risk assessments on the potential costs to the business from each vendor whether they are existing or a outlying potential.
Strategic collaboration will take into account the specific needs of the business, and therefore help also refer back to our third point within part 1 of this series based on selecting and consolidating your vendors. In terms of external collaboration, this will help to allow you to review and track the vendors and the actions they must fulfil or take away from any recent reviews you may have held with them, and if they are carefully selected as an important aspect of the business’s growth, you may also want to include them in larger decision-making processes. This will only grow the relationship you are trying to sustain and help to contribute towards the aggregation of spend if your organisation is loyal and has trust in the most important vendors. Inclusion of the people that matter most for key decisions is always better than exclusion, whether internal or external, in order to jointly satisfy the needs for aggregating your spend and improving value.
Communicating actioned responsibility is a vital area in which allows you to enable the aggregation of your spend comfortably across the business. Calling out the strategic aims of your organisation, and the responsibilities of others to ensure value for money is key to establishing the program and the positive impact it can have.
In order to assure everyone related to this change that it is beneficial to the company’s growth and stability, you must maximise the communications you put across to those employees with concerns over the implementation of spend aggregation. Therefore, you will be able to show your employees that you are confident that the program will tackle these concerns, and inevitably save the company money for the benefits of each and every department within your organisation. Once you have put across your communications to those concerned, you can start to build strategically around the roles and responsibilities which must be fulfilled on a daily basis in order to make the spend aggregation a success. This will only uphold or even increase the value you gain from establishing an effective methodology around the supply chain, and therefore improve all relations and costs which may be held accountable between your company and their third-party vendors.
The roles and responsibilities should be considered and organised appropriately across the procurement office, in order to maintain the value of your supply chain across the supplier relationship management function, as well as ensure there is collaborative efforts that we mentioned in point 5 between all departments of your organisation. The main focus should always be to achieve value and optimise costs across the relations you hold internally and externally, a huge drive for change for cost-containment initiatives.
Across the procurement office is the support to buy, manage and rationally enable the products and services outside of the organisation, in order to allow other departments to operate in a profitable and ethical manner, according to the Chartered Institute of Procurement and Supply. This can consist of various roles, from sourcing the raw materials and services needed for the strategic alignment of the business, to managing relationships and contractual agreements in place across the primary vendor portfolio. However, all these roles which are held within the procurement office ultimately look up to and base their actions upon the team surrounding them and the expertise at hand. That is why it is very important for the procurement office to have the right expertise and team to enable trust, and allow for those within procurement to have a greater understanding of the values and aims of the organisation. This allows for better negotiations, which are overall settled within the teams in place and with the experienced support of C-Level and team leader roles, even when the level of spend at hand is at a low.
Centralising the organisation’s decisions based on those contractual agreements you have with the vendors helping sustain continual business will also help to enable the aggregation of spend. Sharing this expertise across the organisation will only make the enablement of spend aggregation easier, improving the overall views of the SRM function and opening the communications and transparency of everyone within the organisation. This will increase the respect people have for those sourcing the products and services after decisions are made by the highest roles within the business, therefore building upon the trust procurement gain in being able to negotiate and manage with these vendors. This will add to the stepping stones of increasing value, where shared expertise will matter most to increasing your chances of making spend aggregation a success.
If you are losing the information from auditing and insights you gain from your vendors’ performance, as well as the performance of the supplier relationship managers, there is a big chance that you are also losing overall transparency of your spend and value obtained from your vendors. In order to avoid this, the hierarchy of the business – including the board of directors, as well as the procurement leads – have every right to request for reports and informative insights showing the benefits they will gain from new or current vendors, and the performance of managing those relations from the organisation’s supplier relationship managers. This is especially important for the finance department, in order to realise the value they can obtain from having the effective procurement office, transparency and communication, and the expertise and allocated responsibility needed in order to manage those vendors in a valuable manner.
There will always be concern from the hierarchy of the organisation on if they really are obtaining full value from enabling spend aggregation, and that is why the finance department should be consistent in their requests for reports alongside the CPO for example, in order to maintain accuracy and objectivity against the business’s aims. Any shortfalls can be highlighted in these insights, and audited to analyse long-term performance, spot room for improvement, and improve upon the savings you make from managing your vendors in a centralised platform for the sake of managing your reports sufficiently also. So, it is always important to collaborate effectively with those involved in the finances and spending of the organisation, and do so with ease by keeping these insights audited without fail to continuously monitor the performance of your vendors, as well as the supplier relationship managers aiming to retain value from them and the contractual agreements in place. These insights and audit trails may not always prove promising to the strategic aims of aggregating spend, but that will only initiate the incentive for the procurement office to take action and overall prove the value that can be made through future targets to reach, in order to improve your audits.
The outcomes of the spend aggregation only becomes a success once you put all 8 enablers mentioned in this series into a strategic and well-thought plan, which is built around the sole focus of becoming a cost-saving, value-filled organisation. This goes back to the first point mentioned in part 1 of this series, where all of this change being proposed by the procurement office is sponsored by the highest roles within the business, pulling together the other enablers which makes his change management program a huge benefit to the system.
But, in order to support the integration of this change, it is equally important to have the HR department fully aware and involved with the procedures. This is so that they are able to communicate and establish the right policies and regulations, as well as the confirmation of purchases made to support this value-driven exercise, which helps to build upon the sustainability of your spend aggregation program. They are also there to help you continuously improve the co-operation and standardisation of the changes strategically encountered across the implementation. Therefore, without the help of your HR function, there is a much larger struggle to ensure the whole of your organisation is aware of and happy with the change being motivated by the procurement office especially, helping you to communicate the huge value that can be obtained by putting in place the right operating models.
Astute IT talk about why there is a large increase in outsourcing to third-party vendors in today's digital age.