EMS Presentation Summary from ISM May 2008 Conference
By: Expense Management Solutions Printed in: EMS Newsletter Special Edition, Part 1, May 21, 2008
On May 5, 2008, and again on May 7, Chris Malone, a director in the shared services practice of Expense Management Solutions, Inc., presented the session, “Supplier Relationship Management for Complex Outsourced Services: A Strategic Framework.” If you were unable to attend the workshop or the ISM Conference, the following article will provide you with fresh insight into today’s most talked about aspect of outsourcing - effective contract governance and relationship management. Mastering supplier relationship management will unlock millions of dollars in value that, for too many companies, remains elusive. In addition to the following article, you may also download the slides from the presentation by clicking here.
Supplier Relationship Management for Complex Outsourced Services: A Strategic Framework
Throughout the first decade of the 21st century, outsourcing has continued to mature as a business practice. Once considered an option of last resort, outsourcing is now a mainstream business strategy, expanding beyond non-core functions to R & D, innovation, and other areas once thought off-limits.
The processes for sourcing complex services have evolved from art into science. And although there are still those who will tell you that a contract can be based on a handshake and the goodwill of a well-known service provider, most companies with mature outsourcing strategies understand the importance of a rigorous sourcing process built to withstand the scrutiny of Sarbanes-Oxley and demanding shareholders.
The International Association of Outsourcing Professionals has codified these practices into a certification for outsourcing professionals, the Certified Outsourcing Professional. Other organizations like the Institute for Supply Management and the Sourcing Interests Group have also documented and published best practices for professionals engaged in sourcing of products and services. Some companies choose to build these competencies within their organizations, and others choose to hire professionals, like Expense Management Solutions, that have developed and honed their expertise, proprietary tools, and proven processes over decades of successful client engagements.
While great progress has been made refining the science of sourcing complex services, much less attention has been given to supplier management strategies that ensure the supplier relationship delivers the promised return over the lifetime of the contract. Increased outsourcing of strategic services has resulted in supplier relationships of greater quantity and greater complexity. The trend towards consolidation of suppliers to increase leverage means that more value is at risk in each relationship. Meanwhile, performance based contracts are now commonplace, increasing the level of tracking and measurement required to administer a sophisticated and value-driven relationship.
All of these trends have driven recent interest in supplier relationship management. As outsourcing strategies have matured, opportunities to drive savings and value have increased. And yet for many, the promise remains unfulfilled. What’s going wrong? In a September 2006 study by Expense Management Solutions, 52% of respondents indicated that 10% or more of contract value is lost through inconsistent or ineffective application of supplier management strategies. For 12%, that loss exceeded 25% of contract value. Worse, one-third professed to have no clear understanding of how much or their contract value may be leaking away.
Strategic Relationship Management (SRM)
The key to effectively and consistently retaining the full value of your outsourced services relationship is a continuum of activities that we call Strategic Relationship Management (SRM) and is represented by the illustration below.
The activities of SRM include:
- SRM Capabilities Assessment
- Supplier Segmentation
- Demand Management
- Marketplace Management
- Performance Management
SRM Capabilities Assessment
The SRM capabilities assessment is important to ensure that your organization’s sourcing efforts effectively enable SRM activities. Do you have a formal transfer process to transfer all relevant knowledge and materials from the sourcing team to the relationship management team? Have you taken the time to plan how the supplier relationship will be managed, who will be involved, how issues will be resolved or escalated, and how you will measure success and customer satisfaction? Have you planned specific schedules and procedures that will ensure adequate communication at all the levels where the supplier will interact with your organization?
Supplier Segmentation
Supplier segmentation is a process through which you determine how to allocate SRM resources across your portfolio of supplier relationships. Every organization must define its own segmentation criteria based on its business strategy, outsourcing strategy, and the resources available. Once defined, the strategy must be applied to all supplier relationships to ensure consistency and predictability of results. This does not mean that every relationship will be managed in the same way. It does, however, mean that you must be purposeful in determining exactly how each relationship will be managed.
Demand Management
Once a supplier relationship is in place, a commitment to monitor and manage internal demand is critical to ensure that the benefits of the relationship are achieved consistently over time. Demand management will offer insight into opportunities to leverage spend and ensure consistent, timely delivery of goods and services at the contracted level of quality and price. Coordination of accurate demand forecasts with your suppliers will signal your commitment to their success and provide them with more opportunities to maximize efficiency and minimize costs.
Marketplace Management
Monitor your supplier’s marketplace to understand their motivations, drivers, capabilities and the pace of change within the industry. In some cases, your awareness of a major disruption in the marketplace may provide you with additional leverage, and consistent attention to marketplace management will ensure you are not blind-sided if your supplier’s viability or that of the supplier’s industry segment is in jeopardy.
Performance Management
The contract between client and supplier is the blueprint for the relationship. The best contracts include detailed service level agreements and performance based specifications. At-risk compensation, based on well-defined performance measures and scorecards specified in the contract, will ensure that you pay only for the services and quality you receive, and drives the supplier to deliver exactly what was promised. Performance management strategies should always include specific communication strategies and feedback loops to realign the objectives of the client and supplier over time.
SRM Technology
In addition to these activities, a new generation of tools is emerging to help companies manage growing portfolios of outsourced relationships across multiple geographies, and throughout an increasingly complicated network of client and service provider touchpoints.
An integrated, browser-based platform, like the recently introduced Hiperos Relationship Management On Demand™ platform can be used to manage multiple complex services relationships. Unlike previous point-to-point solutions that were often implemented by individual service providers in the past, this new generation of technology is flexible, customizable and accessible anywhere you have internet access. With modules that support supplier segmentation, demand management, marketplace management and performance management activities, Hiperos is a comprehensive SRM technology that standardizes measurement, scoring and reporting across the enterprise, enabling a level of transparency and visibility into supplier relationships that has previously not been possible.
Benefits of SRM
Implementation of a strong SRM program will consistently reduce the cost of outsourced services by pinpointing potential trouble spots early. Identifying misalignment between client objectives and supplier performance, a drop in supplier performance scores or lapses in contract compliance will enable you to correct problems before significant value is lost and the relationship is endangered. You will make better strategic decisions with enhanced visibility into your supplier relationships at the same time that your ability to respond to a rapidly changing business environment is improved.
Expense Management Solutions’ experience working with global or U.S. based companies has demonstrated that organizations that recognize the value of SRM and move quickly to build these capabilities reduce costs, mitigate risk and gain competitive advantage in their marketplace.
If you would like to speak with an Expense Management Solutions representative about SRM, new enabling SRM technologies, or how we have helped our clients save millions of dollars in corporate services expenses, call us today at (508) 460-7014, or send an e-mail to solutions@expensemanagement.com.
