Strategic Sourcing

You read a contract because you are either buying or selling something. On the purchasing side of the transaction, many organizations have a procurement group (called “Purchasing” or “Procurement”, sometimes “Sourcing”) and many also have a contracting group (almost always just “Contracts”). And, within larger organizations, most believe that the combination of the two groups automatically bestows upon the organization the coveted concept of “Strategic Sourcing”.

The mere existence of Purchasing and Contracting teams, even if they’re working together (which isn’t always the case), doesn’t mean that an organization is doing any sourcing, nor does it mean that they’re doing it strategically. The plain truth is that it takes a dedicated effort, above and beyond having the groups working together.

The creation of a strategic sourcing team for your organization (and a strategic sourcing plan) starts with a recognition of the end goal: making purchase decisions based on significant data analysis and always with the best interests of the entire organization in mind. Sounds simple, of course.

Let’s talk about strategy first.

Information alone isn’t helpful. Most organizations’ contracts files are filled with millions of words in thousands of contracts. The information itself is already there – the key is to be able to sift through the data to get exactly (and only) what you need when you need it. This is the primary argument for a good contract management tool (Procuri, Emptoris, Nextance, etc). Once such a system is in place, much of the ground work has been laid – the trick then, of course, is being able to keep the information updated and to be able to mine it.

Your digging and mining is to discover not only where you’re spending your money – but what vendors are doing which types of work, where there are overlaps in skills, even where you have multiple pieces of software doing similar tasks. Again, this isn’t difficult. From the point where you decide to start looking at this information to the point where you have good research results can take as little as six months for an average sized organization. And unfortunately, this is where most organizations stop. They have “a system” – people are even using it faithfully. They know who is doing what, when, and for how much.

Which is why, to get to true Strategic Sourcing, you have to worry about the sourcing side of the phrase.

What’s lacking in most places is this next step: where decisions on purchases change as a result of the data in the system and where some vendors are even eliminated as a result of consolidation and house cleaning (ie: “sourcing” a solution rather than just buying one). This is admittedly a difficult task. Culling through your records (and staying on top of them at all times) to diligently maintain the discipline needed is a full-time task beyond the scope of most contracts and procurement people (who are usually just trying to keep up with demand). Thus, taking a strategic sourcing direction requires additional staff.

And remember when I said “vendor are eliminated”? As you might imagine, this isn’t always a popular decision. Selecting the downsized vendor(s) involves a painstaking process and requires political savvy within the organization. In fact, it might even add additional expense (contract termination fees, replacement systems on other vendor’s platforms, etcetera). No two organizations are identical, each one has to decide what is the right option – but at the end of the day, if strategic sourcing is the goal, the price to get there for an organization that hasn’t been doing it from the start is going to be significant.

On the reverse side of the coin, cost savings from moving to a strategic sourcing model are high. Volume discounts alone, via one or two vendors who do “x” task rather than 30 vendors each doing 1/30th of “x”, can net substantially-reduced expenses. Ask any organization that has done this exercise with their HR staffing contracts – the consolidation consultants themselves promise millions.

But it’s not just cost savings that makes strategic sourcing valuable. The real benefit is in reduced time to contract, fewer agreements/relationships to manage, and the overall reduction in risk from having so many different relationships.

Regardless of where your organization sits on the path, however, the ultimate goal should be Strategic Sourcing. It will take time, effort and cooperation – well worth it for the end result.

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