How to Get the Biggest Bang Out of Procurement: Keep Strategic Spend Close

Where can you get the biggest bang for the buck in Procurement? According to George Joseph, who heads Supply Chain Management and Knowledge Process Outsourcing at Wipro BPO, it's in "strategic spend" – which typically makes up 60-65% of total spend. He suggests a company take their best people and focus them on the most strategic activities. Everything else can be outsourced to leverage better quality resources at a fraction of the cost. Spending time on "tail and tactical" spend is just a bad use of resources he says. SSON interview with George Joseph, Vice President & Head, SCM & KPO at Wipro Technologies George, you run Wipro’s Supply Chain and Knowledge Services BPO. What identifies this industry? The knowledge services side also called KPO includes services in the legal, research, sales and marketing and data management domain. We have a continuum of services "Source to Fill" in the supply chain area, and we go all the way from analyzed spend to delivery of the good or the service. From there it really hands off within Wipro to our F&A practice, which takes the invoice-to-pay cycle. But for a lot of our customers we would contract from beginning to end, so all the way from analytics to final payment. When we talk about procure-to-pay, how does that map onto your source-to-fill? It’s fairly similar. When you think about procure-to-pay, it's really more of a transactional definition where you're talking about somebody sending out a requisition, procuring against that requisition, and then running it through to the payment cycle. When we talk about source-to-fill and invoice-to-pay, we're really talking about engaging right up at the front end, analyzing spend, creating sourcing plans, executing against them, establishing contracts and ensuring compliance. So, sometimes you might even think of it as definitional. When you say procure-to-pay I would see that as a very reactive process. Whereas when you talk of source-to-fill we're really talking about taking the activity that the purchasing function does and making it proactive. How are you differentiating the marketplace? We have institutionalized Wipro’s traditional executional expertise into our 6 pillar delivery framework; Process, People & Location, Technology, Assets & Artefacts, Governance and Transformation. We have a great risk mitigated transition process built on over 900 transitions. We pride ourselves on our ability to work with our customers in building commercial models that meet their requirements and grow with them as their needs change. In addition in all our service lines we have translated our expertise into a model of the function that truly reflects ground realities. As the focus of this conversation is SCM, let me explain the model in Sourcing & Procurement. If you look at an organization and its spend, it basically splits into three buckets: There's strategic spend, which typically makes up about 60-65% of spend; then there's tactical spend, which makes up about 20-25%; and then you have the tail, which is another 10-15%. Strategic spend tends to be large ticket items, multiyear contracts, that kind of thing. It’s typically the kind of sourcing that you can do on a proactive basis. Take a category like hotel rooms. A typical strategy is to set up contracts with two or three hotel chains for an estimated number of rooms, distributed over a series of locations. So that's a strategic contract: You negotiate it; you put it in place. But then someone from marketing says they’re running a show in Atlantic City and they need 500 rooms for two days. This is a large ticket spend, but it's not a multi-year contract. It's not going to fit into my preferred vendors, we need to go and source it. So we would probably go back to the preferred hotel chains, pick up two or three location-specific hotels, and run a sourcing activity with them. Now, this tends to be an abridged sourcing activity; very focused. It typically needs to get turned around fairly quickly, but needs a lot of rigor. So that's tactical spend. It falls within strategic categories but cannot be sourced proactively. It will have to be sourced tactically. If you add these two you'll get somewhere close to 80-85% of your spend, and cover about 20-25% of your supply base. In most organizations the tail tends to be incredibly long. In some companies, 90%+ of suppliers are sitting in the tail, which typically makes up 10-15% of spend. This is the stuff that comes at you non-stop, and you rarely have time to source it. Typically, they are low spending items. The person requisitioning it already knows what he or she wants and from whom and at what price. And then you also have the transaction piece, when an requisition comes in, you validate the requisition, check if there's a contract, if there isn't a contract, do a spot buy … all the way to chasing the PO, making sure the vendor has the PO, etc. So those are the four vertical activities, and in each of these activities there are different process flows. If you think about strategic sourcing, not everything will follow all the steps of the strategic sourcing process. Some will be more complex; some will be simple. So what we've done is we've really defined one or more sourcing processes for each of these vertical sections. This is really taking it to an industrialized model; where our teams around the world are following consistent process for different types of spend. So that's the vertical definition. Another tweak we make is in the relationship between the procurement function and the business function. To be proactive you need to be really embedded in your business function and have their confidence. We believe that most procurement functions spend far too little time on that because they're caught up in the 3,000 tactical activities they have to take care of. It has to be managed internally, really, as it's very difficult for an outsource provider to create those kinds of close relationships with the business function. The second activity is managing the supplier post-contract. In today's world this is really important because a huge amount of innovation is coming from the supply side. If you're not engaged with your strategic suppliers on an ongoing basis you won’t know what's happening and you won't have the opportunity to take the innovation and adopt it internally. So that's another thing that we believe really should be done in-house. And third is what we call native category knowledge: If I may use a rather trivial example to illustrate; would be to know what "white paper" means to your marketing department. Marketing departments will have a particular shade of white or particular configuration of paper, as their standard, and this will vary company by company. Unless you are really embedded with your organization you won’t know what that means, specifically. I am really talking about native knowledge: You need to have that intimacy internally to know what a category means to your organization. So we’ve basically said: These activities you need to do in-house; everything else we can do for you. We've drawn a line in the middle of strategic spend, and part of it, we believe, is best served by a retained, in-house organization. Now, we do make an exception. If a client wants to outsource an entire function, then our suggestion is to re-badge the existing category management team – take them on our rolls but deploy them back into the client organization. In making this in-house vs outsourced distinction, we're not saying that we won't deliver category expertise. We deliver a lot of category expertise, but its category expertise which complements native category expertise and does not replace it. To what extent though is this adherence to "native requirement" in the client’s best interest? Maybe you should be persuading them to loosen up on their white paper specifications? This is an interesting point, because that's what procurement has always tried to do in the past: go to marketing and say, ‘we know where we can get you white paper, cheapest’. But perhaps the question is whether that’s what procurement should be doing. Sometimes it's about picking the battles that you want to fight. I've been in this business for a long time, and I've found that sometimes procurement fights the wrong battles. The important thing is working with the business and letting the business define the strategy on what it wants to buy. Our role is bringing them information on best in class activities in the marketplace, rather than saying, ‘I know where you can buy for less and therefore you should go buy for less’. The trouble is, I might go and negotiate the best rate for white paper, but you really want another kind of white paper and you'll go buy your own white paper anyway. If you talk to a cross-section of CFOs, some of them might say procurement is creative accounting, because they are always saving us money but the P&L doesn't show any difference. We generally see 50-60% leakage because of non-compliance. So there’s a lack of governance? I think success comes from being enablers. Providing the information, analytics, visibility and mechanisms for control. It’s the classic mantra of procurement, right? If only the CEO would put his foot down and insist that everybody did what they were told the firm would save a fortune. Actually very little success comes from being dictatorial and this holds true in all walks of life. We live in an interconnected world, and we have to be enablers. If we're not enablers we are out of the game. But a lot hinges on these internal stakeholder management relationships that need to be built by senior folks internally, not from an outsourced provider. Now, let's get to shared services and how much influence we have over procurement. As you well know, procurement's the laggard when it comes to outsourcing. Finance has been a leader … HR has moved very, very fast. Procurement has been a slower adopter of outsourcing, and there's a good reason for that. It’s not what you'd call a bread-and-butter BPO process. It is a knowledge process. A lot of things that have been easier to outsource have been transactional, tactical, repetitive activities. But procurement is a higher-order activity, and therefore, you need to have a more knowledge-based outsourcing mechanism. Some have first set up their own captive shared services centers, consolidated, and now are comfortable outsourcing it. Others have started by outsourcing the transactional bits and have moved to strategic activities. We're seeing a lot more procurement outsourcing happening now and believe it’s the next big wave. Could you share three tips for folks to get more out of procurement? One of the most important things is to create a much closer working relationship between procurement and the business function, and making it a proactive conversation. So have procurement teams present in business planning sessions so they know up front what needs to happen, what the business plans are, what the expected sourcing cycle is going to look like etc. That makes the procurement function more effective. The second thing is to manage the supplier post-contract, engage more with the supplier, not just as the person or company that gives you a product, but really understand what they're doing, what's happening in the market place, and what kind of innovation they are seeing. And what is tip three? Put a minimum size below which you will not directly deal with a supplier. And here's my logic: why would you directly engage with a supplier with whom you do $100 worth of business? For you it's a transactional nightmare, for the supplier you're the worst customer. Only do business with firms where the size of the business is large enough for you to be interesting to them, and them to be interesting enough to you that you're willing to pay them some attention. You know, if you just did that you would cut out your tail big time. If someone said to you: where shall I focus my effort to get the biggest impact in spend? The biggest bang for the buck is always strategic, which is why we break it up this way and say to clients: ‘Listen, take your best people, and focus them first on the most strategic activities. Everything else we can do for you with better quality resources at a fraction of your cost’. If you take a lot of the tail and the tactical stuff out, and outsource it, and then focus your people on the most strategic activities, then the kind of attention you will pay to your strategic spend is of a completely different order. To what extent are the mid-cap – small to medium-sized enterprises – a significant part of your growth plan? Mid-Cap firms are very important to us. Having broken spend up into these discrete types of activities, we can support fairly small firms. The constraint is the sales cycle, not our ability to do this work. We have to choose where the sales force focusses its energies and so that becomes the constraint. We are looking at various innovative channel strategies and we would encourage small or medium-sized firm to reach out to us. We just recently contracted with a firm that had only $32m of spend to source, we will try to construct a solution that works. [inlinead] George Joseph, Vice President & Head, SCM & Knowledge Services, leads Wipro’s Supply Chain Management and Knowledge Services BPO business. In this role, he is responsible for managing the P&L and all associated activities including sales, building market presence, building capability, overseeing delivery etc. He is a Subject Matter Expert in Supply Chain and is rapidly becoming an expert in the KPO domain.Prior to Wipro, he was a partner with Accenture and helped build a global "Spend Management Services" practice. Earlier, he was part of the executive leadership team that built a global Agri-Business. He is a truly global executive who has lived in and managed large businesses in all the major regions of the World. George completed his MBA from Indian Institute of Management, Ahmedabad and the Sloan Fellowship Master’s Program from London Business School.

How to Get the Biggest Bang Out of Procurement: Keep Strategic Spend Close

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