All posts by Paul Ireland

Paul has over 20 years procurement experience in academic, consulting and management roles with leading universities, global blue chip companies and major public sector organisations. His work has focused on the development of best practice in strategic sourcing and category management and the use of the Internet and IT applications to facilitate best practice. This work has been presented widely at academic and practitioner conferences and disseminated in numerous books and articles.

Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In

cross-functionalityBuilding on our previous analysis of the 12 Major Causes of Sub-Optimality, in a recent blog we outlined why a lack of effective Cross-Functional Involvement & Buy-In is one of the major reasons why effective organisation-wide category management and strategic sourcing cannot be implemented.

It is clear, therefore, that understanding how to achieve senior management buy-in, so that effective cross-functional early engagement occurs, is a prerequisite of successful category management and strategic sourcing.

Achieving buy-in means: having senior managers fully understand the improved value that an effective category management and strategic sourcing approach can bring to the business.

If this is achieved it is normally the case that senior managers will then authorise early involvement, and provide the scarce senior technical staff time and resources to work with Procurement functional staff.  Achieving this is not, however, a simple task. One might argue that it is the single most difficult change management task for a CPO to achieve—and one which in our experience few are fully qualified to undertake or deliver effectively.

Despite this we have worked successfully with CPOs and senior category managers to overcome the lack of buy-in and early involvement problem.  By focusing once again on 3 of the 4 indicative case studies discussed in our previous blog we will explain some of the techniques (summarised as key learning) that can be used to resolve this dilemma.

Overcoming Obstacles to Early Cross-Functional Involvement & Lack of Buy-In

It is obvious that life would be simple if a CPO had nothing more to do than to explain what category management is, so that senior managers and their technical middle management colleagues could change their current behaviour and adopt a more effective cross-functional approach to strategic sourcing.

Unfortunately, in our experience, life is not so simple and there is considerable evidence of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and across all of the organisations we have worked with.

This is because attempts at persuasion by Procurement staff are often ineffective at bringing about the necessary change management required.  The primary reason for this failure to win buy-in is because the business often sees category management as nothing more than an attempt by the Procurement function to impose a new approach on the organisation, in order that it can achieve its own cost reduction targets.

This failure is normally self-inflicted by the Procurement function because of an attachment to a Tactical (Price/Cost Down) rather than Strategic (Value Driven) approach to category management, which alienates everyone outside the Procurement Function before any of the potential benefits can be identified.

Despite this we have found that, even if the Procurement Function is wedded only to a Tactical approach, it is still possible to win a measure of buy-in and early cross-functional involvement, so that significant price/cost down improvements can be achieved.

We explain our key learning about the change management techniques that may assist this type of Tactical (Price/Cost Down) success by reference to three of the cases discussed previously.

Shoot One to Encourage the Others to Open the Door

In this case, the refusal by the Head of a major Business Unit in a multi-Business Unit company to participate in the embryonic category management strategy being developed by the newly created CPO was overcome by an effective use of internal power & leverage analysis and management.

Essentially all senior stakeholders were identified, analysed and then a power and leverage transformation strategy was developed focused on building buy-in amongst like-minded senior ‘allies’ in the company, so that the power of recalcitrant BU Heads was isolated.

The upshot of this strategy was a decision between us and the COO that (given the strategic importance of cost reduction at that time to the company) the first recalcitrant BU Head who failed to agree to a consolidated category management approach would be their removal from their job. The thinking was based on the French General Staff’s strategy in the First World War, namely: “We shoot cowards for treason; to encourage the other troops to obey orders!”

The result of this strategy, which cost one senior BU Head his job, was a 40%+ reduction in the costs of ownership over a three-month period through the adoption of a company-wide consolidation approach to category management.

Kill the Snake with Sunlight

In our second case several Heads of the Business Units stymied the category management transformation initiative by agreeing to provide support in formal meetings, but then refusing to cooperate in practice.

This meant that the category management approach could not be developed uniformly across the business. Furthermore, the relative importance of cost reduction was not as transparent to the COO of this company, and there was no support for the same First World War strategy as discussed above.

Given this, having segmented the BUs using standard internal power & leverage analysis to identify ‘allies’ and ‘opponents’, we linked ‘allies’ with the relative business criticality of the categories of spend that they managed. This allowed us to identify the ‘allies’ managing the categories that provided us with the greatest scope to demonstrate the potential for significant cost reduction for the business as a whole.

By working closely with ‘allies’ who were willing to provide the necessary time and resources we were able to make cost savings of between 30% – 80%. As a result senior managers at the C-Level in the company began to take notice. Gradually enlightenment dawns, and especially if there is a serious cost challenge in the business. In these circumstances, over time waves of categories normally start to be offered for treatment independently by BUs as senior managers recognise the benefits of buy-in and early involvement.

Break the Log–Jam

In our third case, despite some success with some category strategies in a company, and apparent buy-in from senior managers, middle managers on the technical side became the effective barriers to effective implementation. Some of these managers, when forced to attend meetings, simply refused to provide the data to allow early engagement so that demand and supply optimisation options/alternatives could not be fully understood.

This often arises because middle managers have already decided what they think is the best option (whatever the cost), and they do not want to see alternatives put on the table for consideration.

Although persuasion about the benefits of potential alternatives is always the preferred starting point, sometimes this strategy is simply not feasible, and especially when middle managers jealously guard their status and position against Procurement staff.

If persuasion does not work then the only other recourse is to ‘break the log jam’ by resorting to an internal conflict over roles and responsibilities.  This has two potential targets:

  • First, an attempt to replace the recalcitrant technical staff in the existing process to find more congenial technical partners.
  • Second, the mandating of early disclosure of all relevant data as part of a new cross-functional process.

Obviously any such strategy is replete with potential danger, and success will much depend on the current and future balance of power between senior ‘allies’ and ‘opponents’.

In this particular case, the failure to persuade middle managers of the benefits of sharing led to serious internal conflict, with appeals by the CPO and Line Managers to C-Level supporters. The upshot eventually was success for the lower specification / lower risk / lower cost faction led by the Procurement function.

This outcome only occurred because of the support for the alternative strategy proposed by the MD of the company, who over-ruled his technical middle managers after we had worked with other, and more supportive, technical staff to provide the alternative options that persuaded him of the inferiority of the current sourcing strategy. Once again, building an alliance internally of like-minded individuals technically and commercially was key to success.

Key Learning from the Three Cases

The three cases above show that achieving buy-in and early involvement did not occur just because it is a ‘good’ idea; or that people will easily accept change by persuasion alone.

On the contrary, category management must be seen as a potential ‘wrecking ball’ that is directed at the current internal power structures in an organisation. Given this, there are likely to be ‘winners’ and ‘losers’ from any such new category management strategies in the future.

Given this, category management and strategic sourcing implementations based on Tactical (Price/Cost Down) thinking are inherently unstable. This is because they impose Procurement Functional targets on to the rest of the business, at the same time as also threatening existing internal power structures.

To be successful, it is self-evident that the Procurement Function must be blessed with significant senior management buy-in before the event, and/or a sophisticated understanding of how to build alliances in situations of internal conflict after implementation commences.

We summarise below some of our key learning about how to develop effective category management and strategic sourcing strategies in situations of Tactical (Price/Cost Down) implementations, with inevitable internal conflict:

  • Category management implementations are always a ‘wrecking ball’ directed at the current internal power structures of an organisation.
  • Internal conflict is inevitable requiring a sophisticated understanding of how to devise and deliver complex change management initiatives.
  • If drastic action is required, then you must have the necessary internal analytical power & leverage tools to identify allies and opponents effectively.
  • You must also have the ability to develop successful internal alliances with those whose own goals and KPIs are not yours.
  • You must also have the ability to develop practical strategies to deliver valued outcomes.
  • If you have senior management support, you must not be frightened to use it (and sometimes brutally) if you must.
  • If you lack senior internal support for such radical strategies you must replace these with persuasion.
  • To persuade others demonstration categories must be identified that link potential corporate impact with existing senior management support to enlighten recalcitrant senior managers, who currently do not wish to participate, about the benefits of involvement.
  • Do not select categories that will not support the demonstration programme with stellar results—you only get one stab at this strategy and if you cannot deliver the business will not give you a second chance.
  • When faced with middle managers who have closed minds build internal alliances with other technical staff, and ‘break the log jam’ by demonstrating to senior managers the technical and commercial strengths of alternatives.

While this list summarises some of our key learning about how to successfully implement Tactical (Price/Cost Down) approaches to category management there is another way, but it is not one much understood by Procurement professionals in our experience.

This approach engages with cross-functional partners, so that they buy-in to category management and strategic sourcing through persuasion and synergy, while avoiding rancour and internal conflict as much as possible.

To achieve this, you must possess a methodology to understand Value For Money Trade-Offs (i.e. the relative criticality of cost reduction in relation to other sources of corporate value improvement), as well as competence in Value Flow Management.

How to achieve these strategic value-driven rather than merely tactical price/cost based outcomes is explained in more detail in our next blog (Value Flow Management: Value-Driven Category Management & Strategic Sourcing). This explains how we transformed the three cases briefly outlined here to deliver considerable value for money improvements for the organisations concerned.

The Problem of Cross-Functional Involvement & Buy-In

Image1In a recent blog, 12 Causes of Sub-Optimal Category Management & Strategic Sourcingwe outlined some of the key factors (identified during our benchmarking and consulting exercises) that explain why organisations often do not perform as satisfactorily as they might.

In this first of two inter-linked blogs we focus on what we believe to be the issue that has the most significant impact on all of the 12 causes of sub-optimality. This is the problem of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and especially when it tries to develop an effective organisation-wide approach to category management and strategic sourcing.

In this blog we explain, by use of a number of indicative case studies, why achieving effective cross-functional involvement and buy-in can be so difficult. This blog is followed by another that outlines the IIAPS approach to resolving this dilemma.

Evidence of a Lack of Cross-Functional Involvement & Buy-In

In our experience there is considerable evidence of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and across all of the organisations we have worked with.

The following four typical case examples of this endemic problem help set the scene:

The ’Close the Door On Your Way Out’ Case

In this case the Head of a major Business unit in a multi-Business Unit company told the newly created CPO seeking to operate a category management strategy that as far as he was concerned the function only added time and cost to his production operations, and to quote the individual concerned:

Problem-Case1web“The best way for you to help me is to close the door on your way out!”

Given the power of this BU Head in this company it is hardly surprising that the CPO was unable to implement a best practice Category Management & Strategic Sourcing approach.

The ‘Snake in the Grass’ Case

In this case the Head of Operations organises a meeting for the CPO and his Category Management & Strategic Sourcing Transformation Team, and with all of the Heads of the Business Units. Everyone agrees that category management is a fantastic idea to help reduce costs, and everyone agrees to support the initiative.

On attempting to organise workshops to discuss how costs can be reduced through better cross-functional engagement the Transformation Team discovers that most (if not all) of the Business Unit Leaders are unwilling to provide the resourcing for their staff to take an effective part in the discussions. The following exchanges are normal:

Problem-Case2web“You can have a junior member of staff for half an hour on the phone to discuss any demand or design and specification issues”.

It is not easy to develop an effective Category Management & Strategic Sourcing process when Business Units leaders are not prepared in practice to provide the resourcing necessary, whatever they may say in meetings with senior managers.

The ‘You Are Just the Hired Help’ Case

In this case a Business Unit agrees to develop category strategies with the Function and agrees to send some of its middle mangers to cross-functional workshops to help identify cost saving opportunities.

During the discussion on one strategy the Procurement team ask the BU team for early sight of their demand planning and forecasting data to enable to them to understand the demand and supply optimisation opportunities that might be feasible in the future.  The BU team flatly refuse to provide the data on the grounds that it is confidential, secret and only for the eyes of those who develop business strategies. When challenged they state badly:

Problem-Case3web“Look, you guys are much lower in the pecking order. You are here to help us buy what we want, against our specs and as cheaply as possible. Nothing more!”

It is quite difficult to develop an effective Category Management & Strategic Sourcing process when middle managers are not prepared to provide the necessary information to allow one to challenge current design and specification or demand management practices.

The ‘Post-Contractual Myopia’ Case

In this case a company agreed that all Business Units would participate in a cross-functional team to develop a category strategy with the Procurement team to identify cost savings opportunities. In the process a new sourcing strategy was jointly developed.

In the past the engineers in all of the Business Units had a preference for one supplier. The new, jointly agreed, strategy provided framework agreements, both for the incumbent single source supplier and also for two major competitors. This was based on the understanding that the other two suppliers would help to drive lower costs, because their pricing was lower than the incumbents. There was an additional potential cost reducing bonus agreed as well, because further volume discounts were negotiated if any of the two new suppliers achieved more than one-third of the volume each year.

While not involved in its development we happened to review this strategy with the company two years after it was initially devised, and to our surprise we discovered that the initial single source supplier was still receiving 100% of the work, with no discernible cost savings of any kind.  When confronted about the lack of work being awarded to the two lower cost suppliers the engineers in the Business Units basically told us:

Problem-Case4web“We award work to the best supplier not to who the Procurement function would like us to, so that they can make their cost reduction targets. We have far more important issues to worry about than their targets and bonuses!”

Obviously, it is not easy to develop an effective Category Management & Strategic Sourcing process when the Procurement function is unable to understand the relative importance of their own targets and goals when set against those of their cross-functional colleagues in the business.

So What Key Conclusions Can We Draw From These Cases?

The reason for providing these short case studies is because they exemplify many of the common issues that organisations have to face when they try to implement category management, and especially when they attempt to develop a cross-functional approach to sourcing strategies.

Each of the four cases also helps to identify the following 5 key conclusions we have drawn about the effective implementation of category management and strategic sourcing:

  1. It is more often internal, rather than external, factors that thwart effective implementation.
  2. Effective analysis and corrective management of current and future internal stakeholder power and leverage positions is critical to success
  3. Mandated cross-functional early involvement (and with appropriate staff time and resourcing) is an essential requirement
  4. Understanding the relative criticality of cost reduction in relation to other sources of corporate value improvement is a prerequisite of being able to communicate and engage with cross-functional partners, so that they buy-in to category management and strategic sourcing
  5. If you do not possess a methodology for understanding Value For Money, or for how to undertake Value Flow Management, it is not possible to implement category management and strategic sourcing successfully

The reasons for arriving at these 5 general conclusions are outlined in much more detail in our next blog (Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In). This explains how we transformed the four cases outlined here to deliver considerable value for money improvement for the organisations concerned.

12 Causes of Sub-Optimal Category Management & Strategic Sourcing

Evidence from IIAPS Benchmarking & Improvement Methodologies

Most leading organisations have developed a category management and strategic sourcing process, so why do so many of them fail to deliver exceptional value for money outcomes?

Over the last ten years IIAPS benchmarked a large number of organisations using its PSCM Index Methodology.  This approach analyses organisations against 184 attributes of procurement and supply chain management competence. The figure below demonstrates the current performance of organisations by sector when scored against a potential world-class top score of 100%.

PSCM Index Scores by Sector

Few organisations score in the Top Quartile (over 75%), which demonstrates the current lack of overall use of all of the tools that are potentially available to manage procurement and supply chains effectively. Interestingly enough, when we analyse only the use of tools for category management in our database, it is clear that there are significant gaps in across particular steps in the process.

8-Step Process Benchmarking Scores

The figure above demonstrates that organisations score highest for the use of tools in Steps 5 and 6—the market test and negotiation process. They also score reasonably well in Step 3 supply market analysis. The evidence shows, however, that there are significant gaps in performance in the pre-contractual Steps 1, 2 & 4 and post-contractual Steps 7 & 8.

Our view is that it is in these poorest performing Steps that the greatest impact can be made in leveraging improved value for money. So why is performance sub-optimal and so weak in these areas?

IIAPS benchmarking research indicates that there are 12 key causes why sub-optimal performance occurs:

  • Lack of cross-functional buy-in so that all value for money options are never considered
  • Lack of early involvement so that options are closed
  • Insufficient time and resources (people/money) to undertake the necessary analysis of options
  • Excessive fragmentation of spend, with short-term management philosophies dominating organisational sourcing thinking
  • Lack of rigorous and robust current and future spend management data with a lack of segmentation methodology to identify categories of spend
  • Lack of embedded performance management culture using rigorous and robust KPIs for all categories of spend, with focus only on price/cost savings rather than value for money KPIs
  • Endemic maverick spend, with a lack of mandate for Procurement staff to be involved in the whole of the sourcing process pre- and post-contractually
  • Lack of embedded and on-line processes/systems to manage categories of spend, and to undertake sourcing strategy development and/or supplier relationship management
  • Lack of use of sophisticated power and leverage positioning analytical tools to develop sourcing strategies
  • Lack of knowledge management, leading to staff reinventing the wheel
  • Lack of fully competent staff, with a fully rigorous methodology to analyse all value for money trade-off options
  • Failure to fully develop supplier relationship management options in the pre-contractual steps of the process

In our benchmarking experience (as discussed in our World-Class or Best-in-Class? White Paper) these issues recur across all organisations time and again.

We will be writing blogs in the future about each of these 12 key causes of sub-optimal performance. In these blogs my colleagues and I will try to explain IIAPS thinking about how to resolve these issues and improve competence in category management and strategic sourcing.

10 Reasons Why Organisations Make Mistakes When Outsourcing

outsourcingAThe list of major outsourcing failures is extensive and demonstrates that many organisations are guilty of developing and implementing sub-optimal make-buy strategies.

The following provides 3 case examples where outsourcing has led to significant commercial and operational problems.

The NHS’ NPfIT project has seen estimated overruns of £7.6bn, inherent security problems, medical staff unhappy with proposals, and deadlines going out of the window. EDS, Fujitsu, CSC and Capital Care Alliance are amongst the names taking the blame.

Cable & Wireless outsourced global IT services to IBM. 14 months later a benchmarking process revealed an overcharge of £115m for UK operations alone. The dispute between C&W and Big Blue went all the way up to the High Court before being settled in an ‘amicable resolution’, but this meant that C&W could not insource again until after the agreement had expired.

The UK’s Department of Work and Pensions outsourced its IT to Microsoft and EDS. A worker decided to upgrade his desktop to Windows XP, but accidentally applied the changes to the entire network of 80,000 computers which all crashed. This is widely regarded as the worst computer crash in UK government history.

This short blog highlights the following 10 common reasons why organisations appear to make such mistakes when outsourcing:

  1. A lack of a robust and rigorous make-buy methodology that is consistently used by all staff throughout an organisation, with individual managers developing their own idiosyncratic approaches.
  2. A failure by managers at all levels within organisations to be trained in the basic principles of commercial exchange.
  3. A failure to understand pre- and post-contractual power and leverage, and its relationship to moral hazard and lock-in.
  4. Short-term decision-making that is focused primarily on financial headcount reductions and/or operational cost reduction, without consideration for the long-term strategic and operational consequences of this.
  5. A lack of cross-functional participation by all relevant managers and functions within the organisation.
  6. Decisions being made to protect or defend standard operating procedures and historic “turf” boundaries unrelated to a strategic or tactical understanding of value add in the business.
  7. A lack of iterative review of past outsourcing decisions, with a view to a flexible approach to re-insourcing or re-outsourcing past decisions.
  8. A failure to monitor market and supply chain circumstances externally once outsourcing has been undertaken.
  9. A failure to create proactive sourcing mechanisms to drive continuous performance improvement by the supplier once outsourced contracts have been awarded.
  10. A failure to create a robust exit strategy before entering into any outsourcing relationship.

Many companies think about make-buy issues infrequently and this leads managers to devise their make-buy (insource-outsource) methodologies on the spur of the moment. These are normally informed by a common-sense understanding of the key issues, but often without a proper understanding of the keys questions that must be asked about post-contractual moral hazard and lock-in.

Indeed, in over 30 years of working with public and private sector organisations it is very unusual to find those that have a rigorous and robust make-buy methodology that it is taught to all aspiring senior and middle managers in the business.

Many current make-buy decisions appear to be made in order to massage quarterly or annual returns by finding short-term cost reduction opportunities, without any real understanding of the medium to long-term post-contractual risks being entered into.

This is compounded by the fact that the decisions are often made by senior managers, who lack a basic understanding of the principles of commercial exchange, and who have decided what the answer is before the review is undertaken.

Such managers often decide to exclude from the decision-making process those with the necessary commercial knowledge, who are often the very managers who will be operationally responsible for managing any subsequently outsourced business relationships.

8 Major Barriers to Effective Internal Demand Management

Demand ManagementBuyers are frequently faced with significant obstacles before the appropriate sourcing option can be pursued. As is often the case, internal demand constraints act as effective barriers to the appropriate choice of reactive or proactive supply management.

1. Product or service over-specification
In many organisations, the buyer’s internal client often seeks to over-specify the product or service required. This is often referred to as the “gold-plating” of requirements, where the product or service is specified in a way that exceeds the organisation’s requirements. This can be in terms of technical requirements and/or commercial considerations. Subsequently, the internal client’s (and buyer’s) requirements are far more difficult and/or costly to service.

2. Premature establishment of the specification
If internal clients build a supplier’s offering into their design before the organisation has had an opportunity to negotiate with the supplier, the buyer may become locked into the supplier. If the buyer’s purchasing team starts to negotiate with the supplier after the organisation has accrued significant sunk costs in their solution, then it will be negotiating with a supplier that effectively has a monopoly position.

3. Frequent changes in the specification
Organisations that procure complex services often experience a problem associated with the potentially high level of specification change because of the level of uncertainty that surrounds such purchases. However, these pre- and post-contractual problems may be exacerbated by internal client behaviour. The resulting frequent changes to the specification, again after it has built up significant sunk costs in the supplier’s solution, will leave the organisation vulnerable to opportunistic behaviour, even at the pre-contractual stage. Furthermore, the supplier may have to make costly, last-minute alterations to their processes in order to accommodate the changes, thus increasing the nuisance value of the customer to the supplier.

4. Poor demand information
A significant demand management problem relates to the inability of the organisation to access (and analyse) accurate demand information. Poor demand information leads to supply chain players keeping high levels of inventory as insurance, which is against the principles of lean supply. Furthermore, the late placing of orders due to poor demand information makes it difficult for the supplier to pre-plan its production activities and may require the supplier to pay a premium for its own inputs, which it will seek to pass on. Poor demand information clearly puts the organisation in a poor negotiating position in relation to the supplier.

5. Fragmentation of spend
This is a very common demand management problem. Most organisations buy ‘equivalent’ products from a large pool of different suppliers, often through small quantity orders placed at frequent intervals. This situation is often due to internal clients having their own personal preferences for certain products and having their own favourite suppliers. Each separate transaction is of limited value, thus increasing product costs, and the multiple interactions will also lead to higher transaction costs. Leverage opportunities are not possible and the attractiveness of the buyer to the supplier is significantly reduced.

6. Maverick buying
In most organisations, there is a fairly high incidence of internal clients, either buying outside the contracts that have been set up, or buying using procedures that are not compatible with optimising value for money. Therefore, the maverick buyer is unlikely to have access to the requisite supply market information and will not possess the necessary competence in contracting and negotiating. As a result, there will be a further fragmentation of the organisation’s spend, resulting in loss of commercial leverage and the organisation being faced with higher prices. Maverick buying diminishes the relationship between volume and value that underpins the agreements with approved suppliers, thereby destroying the credibility and relative power of the buyer.

7. Inter-departmental power and politics
Individuals or departments will have power resources, which can be drawn upon to either help, or hinder, change within an organisation. At the heart of this is the concept of the principal-agent problem. Managers within departments may have conflicting loyalties when working within organisations. They have loyalty to the organisation, which pays their wages, but also to their department, themselves and their careers. When these loyalties are in conflict, most managers will take action that favours the latter. Internal clients will often, therefore, make sourcing decisions that will secure their own personal advantage rather than furthering the wider interests of the organisation. When the person or department has a high level of intra-organisational power, they will have the ability to obstruct any drive to improve internal demand management, if they so desire.

8. Risk adverse nature and culture of an organisation
The very nature and unique culture of an organisation may act as a further barrier to more effective demand and (subsequent) supply management. Organisations, which tend to be highly risk averse, may find it difficult to adopt the necessary organisational changes required to overcome some of the internal demand problems highlighted thus far. Although not necessarily a direct cause of ineffectual demand management, an organisation’s overriding culture can still act as a serious barrier to change.

In summary, the existence of these barriers often reduces the attractiveness of the buyer to the supplier. Depending upon the specific market conditions, the existence of these barriers can increase the leverage that the supplier has over the buyer. Subsequently, the buyer may be unable to achieve the desired outcomes (value for money) from the relationship.

In order to maximise value for money, organisations must first overcome internal demand problems discussed and then select the appropriate sourcing option to maximise their ability to leverage suppliers.

IIAPS uses the QV® Strategic Sourcing Methodology, which is focused on challenging existing ‘real-life’ category strategies. Integral to this approach is effective demand management, as it brings together internal clients (who design and specify requirements) and PSCM strategy leads to identify the key demand and supply factors impinging on current VFM performance.

The Causes of Major Outsourcing Failures

Outsourcing. Business Background.Many organisations are guilty of sub-optimal strategies because they do not understand the potential pitfalls of outsourcing.

Managers are faced with an avalanche of advice about what they should do to be successful. The academic and consulting management literature is replete with articles and books that provide guides to success, with many case studies explaining why a particular individual or company was successful and what practitioners must do to emulate it in their own organisations.

This is not surprising, because practitioners are keen to find shortcuts and are desperate to emulate those who have been successful. Outsourcing is no different, as it has become something of a dominant approach as organisations seek ways of improving competitive advantage and bottom-line performance.

There are, however, problems with this approach.

  1. Practitioners copying what others have done can be dangerous if the emulator is not operating in exactly the same circumstances as the originator.
  2. A little knowledge can be dangerous. A cursory perusal may allow an emulator to understand in general what the originator did, but not fully to appreciate what was required to put it into practice successfully.

Given that emulators often fail to achieve the same success as originators, it is somewhat surprising that managers do not spend more time trying to understand why. Even more so because, from an early age, human beings do not normally learn by being told what is the correct thing to do. In fact, most of us learn from experience – that is, from making mistakes.

Most of the outsourcing decisions that IIAPS staff have analysed over the last two decades have been failures rather than successes.

By understanding what goes wrong strategically and tactically in outsourcing decisions, practitioners will be in a much better position to understand how to be successful. This is a radically different approach to the normal advice that practitioners receive.

An IIAPS White Paper highlights the major outsourcing failures that we have identified:
Pre-Contractual
1. Outsourcing strategically critical assets
2. Retaining tactically non-critical assets in-house
Post-Contractual
3. Failing to understand post-contractual “moral hazard” and lock-in
4. Inappropriate post-contractual relationship management

Each of these generic problems is outlined, with case studies to provide empirical evidence of the errors that organisations make on a fairly regular basis.

The Whitepaper also provides the 10 major reasons why organisations appear to make these mistakes when outsourcing and the 5 steps to successful outsourcing.

What is clear in practice is that, despite the many thousands of words written on the subject of outsourcing, most organisations we have worked with appear to be guilty of sub-optimal strategies. This is because practitioners do not fully understand the pitfalls of outsourcing.