Validating a Procurement Outsourcing Decision and Assessing a Procurement Outsourcing Center for a Major Global Energy Company

Executive Summary

Everest Group assisted a global energy company, with the following initiatives:  

• Validating its two-year old decision to outsource procurement
• Assessing its current Procurement Outsourcing Center (POC) provider relationship per the provider’s offerings and capabilities in relation to the broader market
• Identifying potential improvement opportunities and themes for evolution of the supplier POC relationship

The Client’s Challenge

The client realized its key indirect procurement requirements, e.g., scalability, sustainability, flexibility, and operational cost savings, would be better addressed through outsourcing. Yet at the time, third-party outsourcing was nascent but gaining traction.

As an existing buyer of human resources and finance and accounting outsourcing services, the company had the enterprise outsourcing maturity for a successful procurement outsourcing relationship. Its initial focus on transactional procure-to-pay (P2P), with a phased scope expansion, was in line with current market trends, and helped drive greater adoption of the outsourced solution.

Two years after beginning its procurement outsourcing initiative, the company wanted to conduct an independent strategy review to validate the indirect procurement organization’s decision to outsource. This was in light of emerging initiatives to explore alternate procurement sourcing models elsewhere in the global client organization. The company also wanted to assess the procurement outsourcing center (POC) relationship in terms of the provider’s offerings and capabilities against those in broader market. The objective was to identify potential improvement opportunities for evolving the relationship, to serve not only its indirect procurement group but also, possibly, other parts of the client’s organization.

Insight to Action

Everest Group determined the POC served primarily as an offshore transactional delivery engine, intersecting most key P2P processes. The exceptions were strategy and accounts payable which were outsourced to other providers as part of finance and accounting and covered non-core categories under the indirect procurement mandate.

Everest Group assessed the POC’s current scope against other organizations’ global procurement outsourcing engagements based on several key dimensions. The Everest Group team found:

1. Performance levels were acceptable, but failure consequences were not formally defined
2. There was a strong operational infrastructure and well-established transition methodology
3. The technology landscape was fragmented and predominantly owned by the energy company
4. The skills and experience of the delivery team met the company’s  requirements
5. The provider was investing well in training, with lower than average attrition
6. The relationship between the client and provider exhibited steady growth in scope, size and profile
7. There were well-established governance mechanisms

But due to the novelty of the relationship, the team found that the initial deal duration was lower than the market standard, and the input-based pricing had limited correlation to outcomes. The contract, while it had adequate coverage of terms and conditions, also had a gap regarding service performance enforcement.

Impact

Everest Group produced a comprehensive assessment of the POC relationship and recommended how to target the next level of value realization. The recommendation centered around four key improvement themes: scope, solution, service provider strategy, and contracting.

For example, the scope of the POC services could be increased across other areas in the sourcing and procure-to-pay space, and could be extended to additional spend categories under indirect procurement, so value can be derived from an end-to-end process. Everest Group recommended refining the solution, with phased augmentation of functionality and refreshing of the technology platforms, as a further value source, along with additional leveraging of the provider’s IT base and platform-based offerings.

Everest Group advised the company to create a service provider strategy that balances the relationship and accountability advantages of using a single provider with the flexibility and lower exit costs of a multi-provider environment.

Also, Everest Group identified areas in which standard contracting practices could immediately be improved, especially in service level management, with development of new service levels and differentiation between service levels and key performance indicators. In suggesting a move to more flexible, outcome-based pricing, Everest Group provided the client with a number of outcome-based pricing models.