Most utility organisations the world over are trying to achieve faster growth through either mergers or acquisitions or rapid expansion in newer markets. The big challenge facing managers is to manage these disparate companies in different geographies with unified policies and procedure to sustain and provide for the rapid growth of the businesses.
Moreover, with bottom lines coming under pressure more than ever before, the increase in profitability can only come from wringing costs from operations and maintenance activities.
Procurement Challenge in Utilities
Typical utilities have around 30% of the total spend on procuring services like temporary labour, marketing, travel, facilities management etc., which is outside the control of procurement function resulting in reduced policy compliances (or so-called “maverick buying”).
The procurement landscape in utility companies is characterised by high process cycle times, high operations costs, a fragmented supplier base with high supplier management costs. There is also minimal usage of technology for automating operations, integrating suppliers and enforcing purchase policies and procedures. CAPS Research Study in April ’05 indicates only 0.38% of total spend being addressed through eProcurement for utility companies.
Procurement Outsourcing as a Solution
Procurement outsourcing is a rapidly emerging option to create a procurement function, which provides for rapid growth of business while maintaining/ improving operational efficiency and effectiveness in the shortest possible time.
For most organisations, Rule Based Procurement is not a core competency and outsourcing companies can easily conduct this labour-intensive process from low cost geographies. This frees their costly resources to accomplish more strategic tasks in high impact areas of direct materials management. Outsourcing offers opportunities to organisations to employ capital more productively instead of investing them in systems and people to run such processes. Organisations demonstrate superior adaptability to change in response to market scenarios since Change Management in an outsourced environment in terms of Policies, Procedures and Technology is much easier. Organisations can have an opportunity to tap into highly capable pool of people employed by the outsourcing partner organisations.
IDC estimates the market for procurement process outsourcing to exceed 12 billion dollars in US alone and growing at a CAGR of over 18%. Today, most organisations firmly believe that outsourcing allows for a more rapid and profitable growth of their businesses and today, almost 40% of the Fortune 500 companies are outsourcing all or part of a business function. 1
Outsourcing Procurement Effectively
Initial engagement of outsourcing, Procurement should focus on low risk and high impact areas like supply market research, managing eRFX/Auction tools, contract management tools. These can be followed by outsourcing operations like catalog management, requisition processing, PO preparation, expediting, receipt handling, invoice matching etc. for indirect materials.
Prepare a cross functional team with people from, procurement domain, technology, Human Resources, and project management. Document the processes (“As – Is” and “To Be”) in terms of Standard Operating Procedures, performance metrics, technology requirements, exception management rules, escalation mechanism, profile of people to operate them, etc. Identify the training needs of team from both sides to facilitate easy operations. Define reporting formats, timelines and methodology under a formal review mechanism for performance achievement under defined SLAs.
During operations phase, work closely with the outsourcing partner to improve the processes using standard methodologies like Kaizen, Six Sigma etc.
Reaping Rewards
By outsourcing the procurement function, utility companies can reap benefits of low cost operations run by highly trained professionals on up to date technology platforms in the shortest possible time. Outsourcing is generally preceded by conducting spend and supplier aggregation efforts to cover increased spend under long term contracts, resulting in direct cost savings to the companies. Outsourcing lends itself for activity aggregation resulting in work and effort consolidation, thus fewer people are required to do those jobs with much higher compliance levels. The companies can then focus on their core functions and grow the business.
The outsourcing partner also brings in expertise to improve processes continuously using scientific methodologies like Six Sigma, Kaizen. A 2004 survey conducted jointly by Institute of Supply Management of 165 large companies indicated an average of 13.2% savings from outsourcing with over 33% respondents indicating the figure of savings in excess of 15%.
Wipro’s procurement solution for a Utilities customer
Wipro outsourced non-core procurement operations of a large company who was using temporary employees with high overheads of training and supervising them. Wipro’s solution which was implemented in less than three months, was not only more cost effective (10% reduction in direct cost), but enabled them to use trained professionals, with little requirement of continuous supervision, thereby ensuring continuity to operations. Wipro also was able to support the company to meet fluctuations in level of activities as and when required.
The path forward
Increasing competition, pricing pressures, mergers and acquisitions, forays into newer geographies are realities around which business operations have to run while maintaining the efficiency and effectiveness. The successful organisations will be those, which will increasingly rely on the expertise of their outsourcing partners in terms of processes, technology, people to look after non-core activities and cutting costs in the process. They will then be able to focus on their core competence and create superior shareholder value.
About the Author
Promod Singhvi (CPIM, CPM) works as a consultant with Wipro Technologies.
About Wipro
Wipro Limited is the first PCMM Level 5 and SEI CMM Level 5 certified IT Services Company globally. Wipro provides comprehensive IT solutions and services, including systems integration, information systems outsourcing, package implementation, software application development and maintenance, and research and development services to corporations globally. Wipro provides an end to end service for outsourcing of back office transaction processing work through an integrated approach spanning process consulting, technology enablement and ultimately outsourcing from offshore. More information is available at www.wipro.com.
