Service Provider Portfolio Strategies: Less is More in the Next Normal | Blog
Historically, large buyers of outsourcing services, i.e., Fortune 500 firms, outsourced their mid- and back-office functions to a single service provider. In the late 1990s, when BP outsourced its business processes to PWC, it was the largest F&A contract in the history of outsourcing, and PWC served BP in multiple geographies. This outsourcing construct was part of a consistent outsourcing wave – many companies outsourced their non-core operations and moved work out to one or two service providers, achieving cost savings as well as the leverage of being able to focus on their core operations.
As outsourcing became increasingly common, buyers began distributing the workload between multiple service providers to create pricing and performance pressure on incumbents. They also started treating their suppliers with a heavy-handed approach, demanding the best price from them, continuously pitting them against their competitors, and expecting optimal service at all times. While this strategy created competitive pressure and mitigated concentration risks, it also led to turf wars between service providers and increased administration costs for companies, resulting in lower efficiency, less control over quality, and ultimately, higher costs as the number of suppliers grew.
Procurement professionals are known to spend their time slicing and dicing through their spend and supply base and observing it from multiple angles to identify ways to drive savings and optimize their supply base. Interestingly, uneven distribution of spend across suppliers and large amounts of tail spend are still key factors that emerge as problems from a thorough spend assessment. Many firms are known to struggle with hidden costs related to non-strategic maverick purchases, which could be better managed if there were clear visibility and alignment on channeling spend through select few suppliers. Additionally, depending on the size of a firm, these purchases can represent hundreds and thousands of suppliers, who are often engaged to fulfill local demands or are part of just a few transactions.
Circa 2020-21, history has returned. Many companies seeking to drive efficiencies across their supplier portfolios are implementing consolidation strategies wherein they are moving towards fewer, more capable service providers. Mostly seen in contact center outsourcing, over the last several years, buyers have been moving away from smaller contracts with multiple providers to a select group of large providers handling larger parts of their operations. There has also been an increase in multi-geography contracts, which indicates buyers are consolidating their global engagements across multiple countries to simplify their operations and offer a consistent customer experience. These large providers (such as Accenture and TCS) can be typically characterized as having a large scale of operations, greater than 100,000 FTEs, a delivery presence across multiple geographies, and greater than $1billion in revenue. As larger service providers have established a global footprint, concentration risks are not a major cause of concern for buyers anymore in outsourcing constructs. During the pandemic, the surge in outsourcing demand accelerated some improvements related to supplier portfolios – a major impact was companies restructuring their supplier portfolios. The pandemic triggered organizations who outsource to increase their focus on risk management, as well as increased their need to digitally transform – which requires a set of new capabilities from providers. As a result, companies are looking for ways to balance needs while reducing costs by restructuring their portfolios. In 2021, 76 percent of companies we surveyed planned to make changes to their service provider portfolios.
In one example of a supplier consolidation activity that we observed in the past, a large software company underwent a supplier consolidation program aligned to its broader supplier relationship management strategy intending to reduce risk to the business, deliver cost savings, and improve supplier performance. Suppliers were segmented in line with the firm’s internal stratification model (strategic, core, and others), which led to the elimination of many tail suppliers, choosing to award business to strategic or core suppliers where they possessed the same or similar capabilities as a tail provider. Throughout the process, the team identified several potential obstacles and built strategies to mitigate them.
Needless to say, supplier consolidation is beneficial for the larger (and more capable) service providers as they receive the bulk of operations from tail providers. Thus, it is not surprising that outsourcing momentum was continuously high despite the pandemic last year for these select leading service providers.
Image source: Market Vista™: 2020 Year in Review and Outlook for 2021
In general, supplier consolidation offers multiple benefits:
- Reduced risk: By having a smaller number of suppliers, the exposure to risk through data breaches, financial irregularities, or other risk factors are reduced and can be managed proactively. For instance, a firm in a regulated industry discovered their supplier was undertaking fraudulent billing practices – the supplier was found billing for eight resources on a project when just five were real. This was uncovered when the same five people would show up to meetings, and three names were fictional. Another firm found that their supplier exposed clients to ransomware, causing several systems to be taken offline. In a WFH context, firms are reducing the number of relationships to minimize the potential threats that surface
- Cost reduction: When a firm channels spend through suppliers they consider strategic and engage them as partners to the business, it is likely that the supplier reciprocates and makes the firm their preferred customer. This allows companies to get better payment terms, service quality, improved quality of products, and comfort of having never to worry about delivery quality of services. While channeling greater spend, companies can obtain negotiated rates that capitalize on a greater spend with a smaller number of suppliers resulting in lower costs and book of business discounts. We have observed that firms typically achieve 22-28 percent savings purely through supplier rationalization efforts for outsourcing partners
- Improved performance: Working with a smaller set of suppliers enables the company to select the best performing suppliers by category and to be able to closely manage performance and easily monitor business KPIs and SLAs agreed with the supplier. It enables the company to define supplier management processes and reporting to track performance and engage suppliers to drive performance improvement activities where gaps are identified through continuous improvement sessions with suppliers
- Increased efficiency of operations: By having a smaller number of suppliers to manage, it can improve the performance of the internal supplier management organization, increasing efficiency and leading to reduced internal costs, including supplier management costs and transaction processing costs. Furthermore, the ease of knowledge transfer, use of proprietary technologies, and improved relationship management at a global level are sure shot benefits of moving toward fewer service providers
While undertaking supplier consolidation, a recommended approach is to start from the basics.
- Firms generally start by developing an understanding of the supply base to identify the spend and type of work placed with existing suppliers and the departments conducting the work
- The next step is to examine the needs of the business for each spend category versus the performance and cost structure of current suppliers. Those that deliver a niche service (for instance, providing a skill set that is not available in the marketplace) may be retained if performance is strong. Consolidation opportunities may exist if certain activities could be performed effectively by multiple suppliers. Balancing competition is important to ensure costs stay in line and there are incentives to perform
- Decision-makers need to ask themselves a defining question about the services they are buying. For example, “If I didn’t already own this, how much would I spend to buy it?” Answering this with cost modeling tools and competitive bidding helps build a supplier consolidation strategy by identifying which suppliers should be used for key activities and accordingly renegotiate contracts, to take full advantage of a reduced set of suppliers and greater spend with the selected subset
Throughout this process, it is paramount for a firm to implement governance to ensure that the business is complying with supplier consolidation strategy and supplier cost, performance, and continuous improvement initiatives are effectively managed.
A final crucial aspect in supplier consolidation is overcoming stakeholder reluctance to change by involving them early on in the consolidation process to avoid surprises, and continuous stakeholder education on the organizational benefits of consolidation. Overall, top-down communication is key so that these initiatives are not perceived as a “procurement” project but rather as a strategic business initiative.
Taking all these factors into consideration, are YOU making the right decisions with respect to your outsourcing portfolio strategies? We are looking at service provider portfolio decisions in outsourced services categories. Take our study on Portfolio Strategy in Outsourcing to find out more.
