I’ve predicted in a number of occasions now that procurement outsourcing in the public sector will take off over the next few years for a number of reasons.

I’m less sure about the private sector, although the pace of technology change does make me think that some organisations will be tempted to go down the outsourcing route rather than invest to stay current with what technology can now add to procurement performance.

Anyway, two more straws in the wind..an OJEU advert from Knowsley Council (acting I believe for a wider group of councils) looking for a supplier to act as a ‘vendor neutral master vendor’ across all consulting spend.  The provider will act as the principal with the council and hence (my understanding) will not be bound by all the tedious EU regs, having to publish contracts etc.  Creative thinking from Knowsley – I’ve seen this happening in other spend categories, but not before in consulting.

Secondly, DHL are making a big push into outsourcing, targeting both private and public sector. They  have a very large contract to use a a beachhead; the NHS Logistics service.  I think if you spoke to 10 different people in Health procurement you would get 10 different views about how successful DHL have been over the 5 years or so they’ve been running the service, but I expect them to be a pretty vigorous player in the market.

As I get older, one of the rules of life that seems to me more and more accurate is the Law of Unintended Consequences.

It works brilliantly in politics and business; decisions cause stuff to happen that no-one foresaw and often actually move matters in a direction opposite to what was intended.

Let’s take a look at this statement from David Cameron. Mr Cameron said NHS managers and other senior civil servants should not earn “more than 20 times the lowest paid” in their organisation.

Now, I am a firm believer that public sector salaries have got out of hand in the last few years. In exactly the same way that salaries for top executives, lawyers, consultants and footballers have got out of hand…Particularly top executives….But what do you think the result of this ‘rule’ will be?

The outsourcing of more low paid jobs.  Simple as that.  Starting salary for a nurse is about £20,000.  A cleaner or similar on minimum wage though is on £11,000.  So outsource all of those bottom end folk and the Chief Exec of the hospital is laughing….if the nurse is the lowest paid, there is scope for a £400K salary at the top.

And of course, the low paid will probably lose some of the generous public sector benefits once they get shipped off to the private sector. They will be worse off – the unintended consequences kicking in.

And actually, isn’t 20 times a bit generous anyway?

This is the first of a series of posts I plan to do around procurement outsourcing over the next few weeks.

I’ve worked client side a few times on outsourcing projects and even done a little on the provider side.  And during the NatWest takeover battle in 2000, we were pursuing a very exciting procurement outsource / JV creation.  That might have left me, as the NW CPO, as the new CEO (and equity holder) in a dynamic, potentially market leading outsourcing provider.  (Sighs and thinks of the yacht….)

Until those nice people at RBS won the takeover and the chain of events ending in banking crisis commenced…..

Anyway, enough ancient history.  I’ve mentioned recently that I see a boom in public sector outsourcing of procurement coming soon, and the private sector market is showing signs of real growth, so for our first post let’s consider why organisations – public or private – outsource procurement.

The overarching reason we would assume is that the organisation will achieve its overall strategic objectives better through outsourcing.  In most cases, this will have an element of ‘bottom line’ benefits; the outsourced service is going to reduce costs / add direct value.  But how will it do that?  There are five main possibilities.

Focus and expertise – “we have indirect spend or low priority categories that will just never get the internal attention they possibly deserve”.   An outsourcer may bring that focus – what is a low priority category for the client may be run by a highly skilled manager in the outsourcing firm who can drive better value / lower costs – “the world’s best buyer of toilet rolls” concept.

Leverage - “we don’t buy much of this category (in terms of the entire market; note our spend may still be large by conventional standards) so we will give it to someone who has real scale and leverage”.  That leverage may come from other clients, or the provider’s own internal business, or both.

Technology and process – “we know there is great technology out there but we don’t have the expertise / budget / time to make our own investment work”.  Someone with P2P transactional management, reverse auctions, contract and supplier management, or other technology already in place can improve efficiency and reduce cost (in a sense, this is a particular subset of the first point but a very powerful one).

Running Cost - “they can run procurement cheaper than we can internally”.  Particularly where there is a large element of transactional processing, with limited automation, moving to outsourcing with an offshoring element can bring savings in staff costs in particular.

Control - “we can’t manage internal spend in a controlled and governed manner – an external provider might”.  Outsourcing and contractualising this can make it easier to control the internal budget holders; they may be ‘forced’ through the power of a formal contract into using the outsourced service, reducing maverick and unmanaged spend.

In my experience, it is often a combination of the ‘focus’ and ‘control’ drivers that are top of the list. Control is a strange one really; in theory at least, there is no reason why an organisation couldn’t drive compliance with an internal team.  But there is no doubt that an external contract can force an organisation into appropriate behaviour.

There are secondary drivers as well; an outsource may lead to better service from the procurement function, it may free up physical space, it may lead to identification of more innovative suppliers,  it may offer better career prospects to the staff who are moved over to the provider.  All of these can be valid reasons  but generally one or more of the value generating drivers will also be key.

Next time, we will discuss what sort of providers there are in the market, and how they might fit against these criteria. But in the meantime, I came across this very useful list of ‘why outsourcing goes wrong’.  We will also  cover that here, but this is well worth a read.

I posted here a few weeks ago concerning my degree of scepticism around procurement outsourcing.  As usual, my ability to predict the future has been proved absolutely spot on, as barley a day has gone by without a new announcement of an outsourcing deal!

I mentioned also in that post my disappointment with the Xchanging shares I’d purchased; the company has clearly been stung into action by my words, and has announced two new deals since then, the latest a £375 million deal with CHEP (the pallet people). Here is Supply Management’s report.

Joking aside, perhaps a range of factors are now coming together that will make procurement outsourcing a more attractive option?   I’m beginning to think that might be particularly true in the public sector.  I’ll post on that over th next couple of weeks; it is slightly contentious stuff so need to get my thoughts in good order!

I haven’t posted up to now on Procurement Outsourcing which seems surprising. But two pieces caught my eye recently; firstly Supply Management reported that procurement people did not fear losing their jobs to outsourcing, coming on the back of a report from the Everest Research Institute which predicts a growth of 25% in procurement outsourcing through 2010.  And an announcement from Siemens that they are moving into this space in a big way.

I am deeply cynical about both of these announcements I’m afraid. I am certainly not against outsourcing, but every year since I was a fresh young buyer was (according to the experts)
going to be ‘the year procurement outsourcing takes off’.  And it hasn’t.  I’ll declare an interest; based on a friendship and knowing the company (and they’re damn good at what they do) I bought a few shares in Xchanging when they floated 3 years ago. Xchanging are a pure-play outsourcing firm, with some real success in the procurement space. But the shares are still 15% lower than at flotation which says something about the growth or otherwise of the procurement outsourcing market. So surveys tend to talk up the prospects because it is in the interest of firms involved to do that.

In terms of the Siemens proposition, I’ve sat as a client side adviser a few times when firms have been selecting procurement outsource providers.  A key issue for Siemens or other providers who are offering the service off the back of their own internal procurement is this.  If the provider spends billions of dollars or Euros internally, and I give you, say 50 million of my spend as an outsourced client, how can you assure me that I will get priority treatment when I need it – won’t your focus be on your billions of internal spend when there is an issue and the proverbial hits the fan?  That was the killer question to one very large provider (not Siemens I should say) that ruled them out of a large outsource I worked on a couple of years ago.

Anyway, despite my doubts about whether this is about to take off, it is a very interesting topic, so we’ll look in future posts at what areas of procurement might be suitable for outsourcing, the drivers, and some other things to look out for if you are going down that route.  And here is a an brilliant piece from Spend Matters on the topic and an excellent specialist outsourcing blog resource (the wonderfully named ‘Horses for Sources’) if you’re interested in more.