By Jon Tonti
Sourcing external service providers to reduce costs and increase efficiency is the strategic sourcing baseline for any company. From that starting point companies grapple with how to get the most out of their strategic sourcing by finding the right providers and then aligning with them. A lot of company money is spent on consultants to advise management teams how to do exactly that. Nearshore Americas talked with Scott Madden’s Andy Flores in order to take advantage of his knowledge and the residual knowledge built up at Scott Madden in regards to strategic sourcing.
Andy Flores is a Partner at Scott Madden and specializes in process redesign, operations improvement, and aligning project management with strategic direction among other areas of expertise. Even before Scott Madden, Andy developed a wealth of experience holding various management positions at a multibillion dollar industrial supply company, serving in the US Marine Corps as an intelligence officer, and receiving an MBA from Emory University.
How much value a company achieves from its strategic sourcing model has to do with the maturity of its strategic sourcing function. The reader can imagine their company sits somewhere on an S-curve of maturity in regards to the way their company strategically sources service providers; if the organization is anywhere on the curve below the inflection point (at which the S-curve turns from positive curvature to negative) there is still a lot to be gained by the understanding of the internal demands and external market forces that informs the maturity of how a company sources.
“Strategic sourcing maturity is the people in procurement understanding how the company spends money across providers and where the highest value can be achieved, which providers are crucial, and what kinds of risks each one represents,” said Flores. “And externally, what does the market say about the services, how is that market structured, is tight or fragmented, does it have high or low barriers to entry?”
Scott Madden recognizes that companies that fall within stage one maturity (no formal buying methodology) are inclined to rely on the same providers over time and analyze spend in a limited way. Stage two maturity may involve the development of ‘reactionary’ cross-function teams to inform important spend decisions. Those teams use a designated strategic sourcing framework, but provider performance would still be managed on a somewhat ad-hoc basis meaning there would be no formal vendor governance organization (VGO) made up of senior leadership.
Stage three maturity consists of durable cross-functional teams using strategic sourcing methodology to analyze spend, detect providers, and monitor the market. Provider performance would also be managed in a more strategic way, perhaps ultimately centralizing in a VGO.
A smart company is one that keeps reexamining itself no matter where it lies on the maturity curve.
A smart company is one that keeps reexamining itself no matter where it lies on the maturity curve. Scott Madden encourages its clients to ask fundamental questions like how much is being spent, in what categories, with which vendors, and what is driving the costs of particular activities?
A mature strategic sourcing operation knows which dynamics drive up cost. Some of the factors to watch for when focusing on spend analysis as pointed out by Scott Madden are excessively complicated specifications, confusing RFPs, unique requirements, too many fragmented providers, poor communication with providers, imprecise demand forecasting, and weak relationship management with providers.
All Eggs in One Basket?
“Provider relationship management and strategic sourcing go hand-in-hand. I have seen cases of companies reducing the amount of vendors they work with that really helped them reduce the amount of money they spent on vendor management. Now is that putting you at greater or less risk; I don’t think the old adage of all your eggs in one basket necessarily applies. I think doing more with fewer vendors creates more opportunity for working better together; it is like a friendship and not us against them. They are true partnerships based on mutual success; the more you engage with providers in product development cycles, early planning, etc. the better off you both are,” remarked Flores.
According to Scott Madden, provider relationship management (which they call supplier relationship management or SRM) is not just follow-on from strategic sourcing to guarantee contract value is realized but instead something more.
Scott Madden advises that this kind of relationship management is only for key providers and involves patience, investment, risk, and executive commitment. The reward is increased innovation and collaboration on new technologies to mitigate risk in the relationship, a reduction in long-term costs from switching, increased service availability, improved product life-cycle / time to market, and increased leveraging of providers staff for problem solving.
The firm has developed a model for provider relationship management that involves formal supplier certification, consolidating spend with top vendors, and the establishment of a vendor helpdesk that centralizes key documentation and conducts vendor surveys. Vendor governance structures are defined to revise and manage indicators established in the RFP / SLA documents, while intense collaboration is sought to manage risk if objectives are not met. Purpose built software to manage the relationship is deployed and third party providers are setup to evaluate vendor performance.