Effective Performance Measurement in Procurement BPO

Transcription

1 Measurement

2 Measurement Executive Summary The procurement outsourcg dustry is now maturg and procurement is creasgly looked at as a natural candidate for outsourcg. Benefits such as process cost savgs, procurement savgs, better compliance and diligence are clearly visible, especially the first year of the engagement. As a result, the question has changed from Should we outsource this function? to How should we best manage this outsourced function? It has been observed that benefits gaed through procurement start erodg year after year without contuous monitorg and improvement itiatives. Key factors that companies should focus on to contuously improve outsourcg performance are: Value realization, which is more important than SLA compliance The relationship of procurement successes and mutual accountability Incremental novation The foundation of a robust, contuously improvg process starts with the structure of the contract itself, and contues to the contract execution and monitorg. This white paper aims to address the set-up of a multi-year procurement outsourcg (PO) engagement and the measurement of key metrics there, highlightg the challenges that companies face effectively measurg the same. It recommends a staged and iterative approach to measurg and monitorg performance on metrics which are critical to contued benefit realization. After each improvement cycle, for tangible benefits to show, the SLAs need to be reviewed so as to identify the ones that need improvement next. Only after this can Stage and Stage 3 be started. Through this iterative process, both parties stand to ga efficiencies and improved levels of service that really matter.

3 Measurement Typical Structure of Procurement ontracts tract Typ on e These are simple and transparent. A key risk to companies enterg to long-term contracts with outsourced suppliers is the impact that the suppliers have on the existg processes. A logical derivative is a fixed fee contract with penalties for missg SLAs. Such a contract is defensive and does not provide centives for the supplier to contuously improve the process. Also, these agreements are not robust agast demand variability. Based on the table below, the contract structure or blend of structures should be selected. 1) SLA-based Fixed Fee ontracts Fixed Fee e tract Typ on FTE Based Fee Transparency Ongog osts Risks When to enter Strategic Sourcg Sourcg Support tract Typ on e managed spend) Fee as % Spend Fee Transparency Ongog osts Risks When to enter Significant demand vanance High volume of low spend transactions 4) Ga-sharg Agreements (where total fee depends on amount of savgs the provider tract Typ on e brgs ) These are perceived as the least transparent contracts. In a recent study carried out by Procurement Leaders, it was found that about 65 per cent of respondents were unable to measure the fancial return of procurement outsourcg. However, our view, these contracts also lay the groundwork and centives for the supplier to contuously improve the process and realize tangible gas from the same. Risks When to enter 3) Spend-tied ontracts (where the fees of the outsourced provider depend on the Spend-tied agreements do not offer clear transparency upfront supplier fees. However, cases where there is a high number of low volume transactions with significant demand variance, the supplier fees can easily be traced back to the volume processed. Though the upfront vestment these deals is low, ongog costs can be higher. As the supplier fees are not tied to clear targets on value realized, the risk of a company payg the supplier for transaction processg without any significant value significantly creases. Ongog osts Procurement Operations Predictable Demand ) FTE-based (Time and Material) ontracts These are also simple contracts, but require an creased level of monitorg from the company. They are ideal for cases where the demand variability is very high, as sourcg support and strategic sourcg. They lack the centives for the supplier to contuously improve the process. Fee Transparency Fee as % Savgs (Ga Sharg Agreement) Fee Transparency Ongog osts Risks When to enter Strategic Sourcg Activity Based Engagements

4 What are Service Level Agreements Procurement Outsourcg? realized by the customer terms of reduced costs. SLAs should be periodically reviewed to ensure relevance, based on changg busess situations. Unfortunately, many clients simply measure everythg that can be measured, resultg exhaustive reports which key metrics get lost. Different SLAs require different treatments, as shown below: High risk on missg SLAs are agreements on key metrics that would be measured to evaluate performance of a supplier. SLAs vary, dependg on the nature of the procurement outsourcg deal, and provide a common ground for periodic communication with the customers. The method of measurement of the SLA should be taken to account for calculatg the value 3. onsistency Six Sigma Time to answer % savgs End-to-end turnaround time Lean VALUE High Incremental value all length 4. Discard SLA The above framework helps us determe which SLAs are relevant, which ones should be held steady and which ones should be improved upon. There are two dimensions along which an SLA can be useful: Low risk on missg RISK Low Incremental value 1. onsistent improvement % requests closed first call. Improvement Incremental value derived from improvg on that SLA, for example, crease savgs percentage is direct value realized. Risk associated with missg the SLA, for example, unpredictable turnaround time can hold up busess. 3

5 3. onsistency 1. onsistent Improvement These SLAs have a large downside if ignored, but not much benefit if improved upon. These SLAs have a large downside if ignored, as well as significant benefit from improvement. For example, call answer time improvg from 30s to 0s does not affect overall turnaround time much, but missg the 30s SLA can be very irritatg. For example, percentile savgs any crease is a large benefit, and if we miss the SLA, that is an equally large downside as both hit the bottom-le. The aim here is to reduce the variance these SLAs, for which Six Sigma is the ideal process. The aim is to achieve contuous and consistent improvement, i.e., push for improvement, but not at the cost of consistency. 4. Discard These SLAs have neither a large downside if ignored, nor a large benefit from improvg on them For example, call length while this can matter some high-volume transactional BPOs, for most procurement BPOs, it is not a critical metric..as there is no impact of any change this metric, we should stop measurg it and focus on the other three groups. In Summery, It is important to note that not all SLAs add value. The supplier, as well as client resources, is best utilized by selectg the right concise set of metrics, and then classifyg them to ones. Improvement These SLAs have a small downside if ignored, and considerable benefit if improved upon. For example, percentile requests closed first call the more requests we can close the first call, the more satisfied the requestor is. Increasg this percentage helps quality perception as well as efficiency. The aim here is to make an all-out push for improvg the metric, even if it leads to some consistency. where improvement will yield value versus ones where consistency will yield value. It is important to know what end-result we are tryg to fluence by measurg each SLA. 4

6 Lean for Improvement SLAs The Lean framework identifies the sources of wastage and recommends measures to elimate them, thereby improvg process efficiency and quality. As noted the previous section, the SLAs the Improvement and consistent improvement quadrants need to be examed under lean prciples. Assumptions: The Supplier for the product has been selected through a rigorous sourcg process and the customer already has a contract with the Supplier TP is the time taken by procurement to fill a PO for a product TTOT is the total time between when a requisition is raised by a requisitioner to PO receipt by the product Total Operational ycle Time = Time Towards Value Added Activity (fillg a PO) + Time Spent on Non-Value Added Activities (Time Takento Assign Request to a Buyer + Time Taken by Buyer to transfer data from Requisition to PO + Time Taken to Review the PO Information + Time Taken to Approve the PO + Time Taken to Send PO to the Supplier). Investments expandg the scale of Procurement Outsourcg team usually volve creasg the team size and thereby focus upon reduction TP. However, the goal of Lean is to reduce the Total Operational ycle Time (TTOT) by reducg the time taken for non-value addg activities and thereby elimatg any source of waste. Time on nonvalue added activities be reduced through a preset rules (either the system or manually) where a map of busess unit to Buyer is created and implemented, to reduce the Time Taken to Assign Request to a Buyer. Similarly time to transfer data from requisition to PO could be elimated through technology implementation or through a guide on mappg requisition data to the PO form (eg. Field 1 on Requisition should be filled to Field A of the PO form). Identification of sources of waste and their elimation should be an iterative process and improvement operational cycle time with each process change should be measured to evaluate the overall effectiveness of the contuous improvement itiative. 5

7 Six Sigma for onsistency SLAs The Six-Sigma framework focuses on reducg process variability by reducg defects identified opportunities. For stance, if the SLA for average time to answer calls is 0 seconds, then both Scenario A scenarios below yield results with the defed SLAs, but Scenario A has higher process variability than scenario B. Scenario B HelpDesk Associate all Number Time to Answer (sec) HelpDesk Associate all Number Time to Answer (sec) A 1 33 A 1 B B D 4 1 D AverageTimeperall AverageTimeperall 1.5 The above process variability would lead to a bullwhip effect and could cause downstream impact on customer satisfaction or could result creased operational cycle time. Identifyg the above opportunities and devisg methods to reduce defects (eg, A takes 13 seconds In this specific example, trag Associate A on the systems or processes, or even trag the end-user on providg required formation to the helpdesk associate could reduce the defect rate. more than the required SLA to answer the customer call) will result reduced process variability and, thereby, positively impact downstream processes. Assumg the total number of associates to be three, the number of tickets raised by the helpdesk associate as four, the opportunities the above example would be as follows: (I) Associates 3 opportunities (ii) Ticketg Software 0 opportunities (number of fields on the form) (iii) Ticket raised 4 opportunities (iv) Trag Guide 50 opportunities (number of similar queries) When the process variability is reduced to ensure that there are 3.4 defects per million identified opportunities, the process is said to meet the Six Sigma standards. Similar to Lean, Six Sigma is a contuous improvement framework and volves iteratively identifyg opportunities and measurg the defects. 6

8 ase study on ontuous Improvement - Procurement Hub lient: A fortune 500 global company was havg problems gettg employees to comply with policies and follow procurement direction cludg orderg processes and standardizg their PP operations. The company was not meetg its targets on various metrics, cludg spend percentile with approved vendors. Employees complaed that the PP process was not standardized and they did not know how long anythg would take. GEP focused on the procurement department's communication, delivery modes, and the various compliance checks. The problem was defed and basele metrics identified. The company's procurement website was one webpage with lks to the policies and a lk to send an if the employee had any questions. GEP built a refreshed procurement hub encased concise SLAs. The new, robust portal ultimately housed: 1) Department and category-specific policies, cludg category profiles and how to buy 3) Procedures and trag documentation to walk the employee through the orderg processes 4) FAQs with search capability 5) Easy ways to contact procurement for help cludg help desk contact fo and stant web chat 6) All transactional activities routed through help desk, and monitored by a ticketg system with metrics Under the new direction from procurement and the enhanced procurement hub, the company experienced stant compliance creases some regions up to 50% with a matter of a few weeks. These changes were measured and reported back to the organization, leadg to a second wave of awareness and terest. With the next two months, the resolution times contued to improve with central monitorg. ) Lks to specific technologies to stantly help the employee place the order 7

9 GEP helps global enterprises operate more efficiently and effectively, ga competitive advantage, boost profitability, and maximize busess and shareholder value. Fresh thkg, novative products, unrivaled doma and subject expertise, and smart, passionate people this is how GEP creates and delivers unified busess solutions of unprecedented scale, power and effectiveness. With 14 offices and operations centers Europe, Asia and the Americas, lark, New Jersey-based GEP helps enterprises worldwide realize their strategic, operational and fancial objectives. Recently named Best Supplier at the EPI Procurement Excellence Awards, GEP is frequently honored as an novator and leadg provider of source-to-pay procurement software by top dustry and technology analysts, such as Forrester, Gartner, Spend Matters, Paystream and Ardent Partners. GEP also earns top honors consultg and managed services from the dustry s leadg research firms, professional associations and journals, cludg Everest Group on its PEAK Matrices of Procurement Services Providers and Supply ha Services Providers; NelsonHall on its NEAT Matrix of Global Service Providers; HfS its Blueprt Report on Procurement-as-a-Service; and ALM Intelligence its Vanguard Reports on both Procurement onsultg and Supply ha onsultg. To learn more about our comprehensive range of strategic and managed services, please visit For more about SMART by GEP, our cloud-native, unified source-to-pay platform, please visit Access our free knowledge resources at Walnut Avenue, lark, NJ P fo@gep.com lark, NJ Prceton Toronto Dubl London Prague Mumbai Hyderabad Shanghai Mexico ity osta Rica São Paulo Sgapore Sydney opyright 017 GEP. All rights reserved.