Tackling the tactical with procurement outsourcing

I was recently catching up with Mary Kachinsky, vice president of strategic sourcing and operations at FORMA Therapeutics, a drug company based in Watertown, Massachusetts, and our discussion turned to procurement outsourcing. I had heard that a trend toward outsourcing tactical parts of the procurement process had slowed after the recession and had yet to recover. Kachinsky, in response, shared her own experiences with outsourcing.

Earlier in her career in a procurement leadership role at the pharmaceutical giant Pfizer, she had faced the outsourcing question. After much thought, she decided not to outsource tactical procurement, which includes such activities as placing orders; reconciling invoices; and receiving items such as office, lab and maintenance, repair, and operations (MRO) supplies. She figured her team could do these tasks at a cost that was competitive with a procurement services provider and offer better service. Now, in her role at FORMA, where she has a small team, she is outsourcing tactical procurement. She says doing so helps achieve her goal of "adding value beyond cost."

Whether she chooses to outsourcing or not, Kachinsky gets it. As more procurement teams take responsibility for managing indirect procurement categories, such as office, lab, and MRO supplies, they need to take control of managing the processes involved in purchasing these items. Leaving the ordering and reconciling to internal customers can be inefficient and costly and take time away from their jobs.

To manage tactical procurement, chief procurement officers can create a hub within their own teams that focus on it like Kachinsky did at Pfizer, or they can negotiate agreements with suppliers and have internal customers use procurement credit cards to buy from preferred providers. They can invest in procure-to-pay software (which we will discuss further in this column in December), or they can outsource procurement like Kachinsky is doing at her current company.

When some think of outsourcing, they often picture companies deciding whether to make a part themselves or have a third party do it. Outsourcing over the years has also come to mean looking to service providers to do the tactical for a fee. Companies can outsource these processes to providers based in the U.S. or other regions of the world. The benefits of outsourcing tactical procurement include improved efficiency, reduced cost, and, most importantly, time to focus on the strategic.

While outsourcing is a complex process—and each arrangement is different—there are "rules of thumb" procurement can follow that help ensure success. First, procurement must be involved in every step—from making the initial decision to outsource, to determining the company's requirements, to selecting a provider and measuring its performance throughout the life of the contract. Internal customers whose work will be touched by the provider, such as accounts payable (AP), also should be included in this process.

It's also critical for procurement to have a good understanding of the company's requirements and knowledge of the provider's corporate culture and goals. These can help procurement develop metrics to measure the provider's performance. Key for most everyone are: cost, timeliness at order processing, and customer service.

With tactical procurement under control, CPOs can focus their energy where it belongs: on the more strategic parts of their jobs. Like Kachinsky, they will be able to achieve such goals as "adding value beyond cost."