Five Benefits of a Sourcing Audit
Written by By Keith Fiveson, CEO, Managing Consultant Thursday, 22 April 2010 14:15
The sourcing audit provides an organization with five key benefits that translate directly to bottom line results to increase the company’s relationship value and return on investment. The sourcing audit provides an ongoing structured approach to managing the health of valued supplier and client relationships as well as internal resources..
Business Imperatives:
• Sourcing is a strategic imperative for companies enabling global expansion into new markets, lower cost and profitability. The sourcing audit can be implemented with business process management (BPM) initiatives for IT, business process operations and call center applications to leverage strengths and minimize inefficiencies. The scope and design of regular sourcing audits need to be scheduled during contract formation and implemented at defined periods following the execution of the transition plan. Executives should proactively drive the methodology and content of the sourcing audit as well as lead both internal and external resources required to complete the audit.
• Executives should design sourcing relationships and activities that avoid difficulties in conducting periodic audits. Planning in advance for regular audits can save an organization time, money, and headaches. Key information and process flows need to be documented and updated on an ongoing basis. Executives as well as the suppliers of services should review contract terms and conditions periodically to ensure ongoing and continually increasing value.
• The outcomes of a sourcing audit should be used for improvement of sourcing relationships. A sourcing audit details several action items that are the responsibility of executives to implement. Executives should prioritize and execute these action items to increase profitability, reduce risk, and increase internal and external customer satisfaction.
Regardless of whether the relationship is domestic or international, in Indiana or India, a sourcing audit should be a part of a scheduled and managed process that enables an organization to govern the health and longevity of sourcing relationships. There are five key positive outcomes that an organization can experience by implementing a sourcing audit. This Research Note details the importance of conducting a sourcing audit as a preventative maintenance procedure, opportunity to increase value, and means to decrease overall sourcing costs. The benefits are listed in Figure 1 and described further in subsequent sections.
Five Benefits From Conducting a Sourcing Audit
- Compliance, review and assessment of risk and opportunities for improvement
- Identification of areas of productivity improvement and cost reduction
- Identification of areas for improvement in processes and quality
- Creation of a business blueprint to measure, adapt, and change
- Benchmarking actual against expected results
Compliance, review and assessment of risks and opportunities for improvement
Contract compliance impacts the organizations on a macro and micro basis. Meeting compliance standards is a minimum goal of contract management and intent. Government regulations, intellectual property, certification, client satisfaction, productivity, quality, reporting, technology updates, software innovation, and contingency planning are all measured and subject to compliance to under the contract.The audit assesses service level assurances and commitments guaranteed through the sourcing agreement. Acting on the maxim “what gets measured gets managed” ensures that a sourcing supplier can effectively provide services described in the contract. Ongoing measurements of contractual service-level metrics in the relationship contribute to a reduction of risk and identification of opportunities for improvement on both sides of the contract. Examples of these metrics differ, depending upon the sourcing relationship, but may include things like time to delivery, software defect metrics, average speed of answer, first call resolution, etc
Legal and regulatory compliance is necessary is around information and international privacy restrictions. The Sarbanes-Oxley Act of 2002 (SOX) has had many organization implement compliance standards and audits to ensure that employees and vendors at all levels be more conscious and responsible Since the work products and deliverables from a sourcing relationship serve as inputs to the business as a whole, vendor operations must be auditable to comply with SOX. Additionally, provisions in the Gramm-Leach-Bliley Act of 1999 have expanded security requirements for customer information. When customer data passes outside the United States the laws affecting the privacy of that data are under the jurisdiction of that nation. Canadian, European, and potentially forthcoming Indian privacy regulations are generally more stringent than those found in the US. A crackdown on privacy could come with fines or costly mandates to restructure a business operation. An effective sourcing audit incorporates an evaluation of legal and regulatory risks and suggests means to mitigate these risks.
The sourcing audit helps to mitigate risk in sourcing relationships, around competitive and intellectual property. Theft of intellectual property such as customer information, application code, or process design could prove disastrous for an organization. The sharing of this information with competitors could displace an organization from the market. Executives need to take steps to ensure that intellectual property shared in sourcing relationships does not create or assist a competitor or place all of the process knowledge entirely within an external organization.
Another area of risk mitigation is contingency and continuity planning for natural or man made disasters. Hurricane Katrina and the tsunami that struck Asia in late 2004 caused not only the tragic loss of life but also unforeseen damages in the billions of dollars as well as economic affects that remain to be understood.. Contingencies for geopolitical risk are also a concern that needs to be planned for and periodically reviewed. A sourcing audit validates and points out gaps in existing contingency and disaster recovery plans and can highlight needed assurances and insurances to prevent unforeseen risks from being realized.
Identification of areas of productivity improvement and cost reduction
Opportunities for productivity and cost improvements can be realized through a comprehensive sourcing audit. By examining areas of efficiency, service level agreements, and ancillary expenditures an executive can verify that cost savings from sourcing activities do not spill outside of the organization as weeks and months go by. Small inefficiencies in repetitive processes can result in large unnecessary expenditures over time. By examining the way an organization completes key business tasks an executive can identify ways he or she can do more with less. A sourcing audit realigns an organization’s key metrics and uses industry leading benchmarks to determine true value and ROI of a sourcing relationship. Utilizing the output of an audit allows an executive to identify areas where they may be able to receive credit for additional work by a supplier.
A sourcing audit offers opportunities for improvements in cost and productivity by evaluating expenditures in the areas of travel, software, infrastructure, human resources to ensure that an organization’s monetary outflows are providing maximum value to the business. In many cases a tighter service provider travel policy or staff retention plan can save an executive a significant amount of money on their budget. Several types of sourcing tasks such as routine coding, accounting processes, and call center operations can become less costly as processes evolve and as more competitors enter the marketplace. A sourcing audit identifies these opportunities for lower operational costs.
Identification of areas for improvement in processes and quality
The sourcing audit allows an executive to identify opportunities to improve the level of quality output for internal and external customer satisfaction. Outputs from a sourcing audit include a prioritized list of productivity action items for measured improvement. Additionally, a sourcing audit can determine when quality standards and methodologies such as the Carnegie Mellon University's Software Engineering Institute (SEI) Capability Maturity Model (CMM), the eSourcing Capability Model, (eSCM), the Project Management Institute (PMI) methodology, IBM Corp.'s Rational Unified Process (RUP), and others should be implemented as appropriate to increase the overall level of quality within an organization.
Creation of a business blueprint to adapt to change
Sourcing relationships, whether insourced or outsourced, stretch an enterprise in several different directions. The sourcing audit offers a complete picture of the extended organization’s inputs, process requirements, and outputs as well as the various areas where customer value resides. It offers a vision of the complete organization and allows an executive to understand scenarios that help adapt and prepare for both internal as well as externally driven changes. A graphical business blueprint improves an executive’s capabilities in logistical planning, budget and resource forecasting, and growth scenario development. Additional knowledge about an organization’s inputs, processes and outputs helps an executive conceptualize and communicate opportunities for growth, profit retention, and expansion as well as achieve buy in for improvements to the business.
Benchmarking actual against expected results
An effective annual sourcing audit allows an organization to objectively judge its own successes and failures year after year. By comparing the expanded organization to both pre-sourcing as well as industry equivalents, an executive can effectively measure the performance of efforts of both the sourcing service provider as well as internal resources. Typical sourcing contracts average three years in length with financial commitments can range into the millions of dollars and well-managed relationships that provide ongoing value can last for ten years or more. Inefficiencies in change management, governance of interrelationships between people, technology, information and/or security increases risk, decreases value, and can lead to costly litigation. A sourcing audit identifies issues in relationships, strategies and operations, and catches little problems before they cause significant impact.
Figure 2: The Sourcing Audit Cycle – By using the sourcing audit cycle as seen below an organization can identify opportunities for improvements in the productivity of people, the efficiency of operational process, and the value of information. These benefits are facilitated through IT systems which are comprised of technology and security processes. Elements of the relationship such as requirements, management reports, service delivery, and financial disbursements are examined to identify areas for increased efficiency and operational improvement.
Conclusions:
ITESA believes that executives can improve the quality of their sourcing relationships, reduce risk, and increase profitability by conducting and acting upon the results from annual sourcing audits. A well-defined sourcing audit conducted by an internal sourcing manager and a team of objective external experts provides the most value to organizations. Executives should realize that any failure to appropriately examine the inner workings of enterprise sourcing relationships could result in expenditures far exceeding planned outcomes and far exceed the anticipated cost savings from sourcing efforts.
Representative Clients
Convergence Consulting
