First Worldwide Research Symposium

Tempe, AZ
March 1995

Author(s):

Michiel R. Leenders, PMAC Professor of Purchasing Management, Western Business School, The University of Western Ontario, London, Ontario, Canada N6A 3K7

ABSTRACT
Meaningful involvement in the management and operation of any organization has been purchasing's quest since its functional specification began. Terms like strategic acquisition or supply management, integrated procurement and a variety of others have attempted to convey the aspirations of supply practitioners and academics. The relatively recent emergence of outsourcing has created a paradox. Theoretically, as a larger percentage of an organization's revenue stream is diverted to suppliers, the status, relevance and importance of the supply management organization should increase. In reality, several current research projects and a number of others suggest that in many outsourcing initiatives purchasing played an insignificant role.

Meaningful involvement in the management and operation of any organization has been purchasing's quest since its functional specification began. Terms like strategic acquisition or supply management, integrated procurement and a variety of others have attempted to convey the aspirations of supply practitioners and academics. The relatively recent emergence of outsourcing has created a paradox. Theoretically, as a larger percentage of an organization's revenue stream is diverted to suppliers, the status, relevance and importance of the supply management organization should increase. In reality, several current research projects and a number of others suggest that in many outsourcing initiatives purchasing played an insignificant role.

Meaningful Involvement
Purchasing as a profession has carried a significant organizational inferiority complex. 1,2 Evidence such as low pay, minimal qualifications, low status, lack of advancement opportunities, low reporting level and exclusion from organizational strategy development reinforced this complex. 3 How to characterize purchasing's aspirations properly has been a major problem for me for many years. It was not until the doctoral research of Ian Stewart 4 on purchasing's role in equipment acquisition research and development organizations, that the term meaningful involvement became relevant. After all, in R&D settings, flooded with the highest level of expertise in the sciences and at the frontiers of technology, the case for anything beyond clerical contribution on the part of purchasing appeared terribly weak.

Industrial marketing research into buying influences clearly identifies the multiplicity of factors and players involved in industrial procurement decisions. 5 Perhaps it was the territorial instinct, purchasing's desire to carve out a clearly defined responsibility territory and to defends its turf against intruders that has created the silo image of the function. As purchasing professionals we defined mastery over our territory as the evidence that we were in control.

The new paradigms of team-building, empowerment, sharing, project management, continuing improvement and reengineering to achieve customer satisfaction and a competitive edge have made the silo concept of management obsolete. How supply management is supposed to contribute effectively to organizational goals and strategies requires a new flexibility and a different vision for procurement's role. The term meaningful involvement as a continuing aspiration avoids the question of territory and focuses on the purpose of supply management expertise. What can a supply manager bring to a table where a decision is deliberated that others cannot?

Evidence of meaningful involvement in terms of decisions taken is supplied if the others involved in the decision making process, because of information, alternatives or ideas provided by the supply manager: (1) have greater confidence in the decision; (2) have changed to another alternative; (3) have changed the budget or other resource allocations; (4) have changed the timetable; (5) have changed the implementation plan; (6) have reached the decision faster; (7) have delayed the decision to allow for more information gathering.

Evidence of meaningful involvement in the decision making process would include: (1) active solicitation of supply input on major decisions being deliberated; (2) assignment of supply personnel to standing committees concerned with planning new directions or strategies for the organizations; (3) assignment of supply personnel to temporary task forces, projects, groups, focus groups, teams, or other organizational efforts to address specific tasks, problems or opportunities; (4) formal requests for purchasing initiatives to exploit opportunities in the marketplace; (5) non-solicited initiatives from supply which are acted upon and supported by others in the organization; (6) ready access to non-supply information for supply personnel and vice-versa; (7) availability of extra resources, when justified, to develop and exploit supply opportunities; (8) requests to have supply personnel transferred or promoted within the organization; (9) managerial support for regular reporting by supply managers; (10) management acknowledgement of and appreciation for significant supply contributions.

The existence of meaningful involvement for supply really requires that strong evidence must exist that the organization has committed to the idea that suppliers and the way it relates to them is vital to its success. 6 The challenge for the individual supply manager and for the supply profession is that others in the organization may not see the need for a meaningful contribution from supply or ignore the need for supply expertise. What has been happening in outsourcing suggests that purchasing and supply management are still far away from meaningful involvement.

Make or Buy, Impartition and Outsourcing
Theoretically, at least the make or buy decision is one of those critical decisions that shape an organization right from the start. The size and scope of the organization and its focus will be determined by what it chooses to do in-house and what is purchased outside. After the organization is in existence, the make or buy question has traditionally been raised in an expansion or new product or new service context. Even though purchasing was supposed to scan the marketplace continually to find opportunities to reverse former make decisions, in reality this seldom happens. One of the original major researchers of make or buy, James W. Culliton, 7 showed that one of the disadvantages of the make decision was its permanence. It was difficult to reverse because space, people, equipment and systems could not be easily divested. In Culliton's opinion the make decision was too often taken for spurious reasons. Perhaps the current outsourcing movement is a belated recognition of what Culliton espoused about 50 years ago.

Professor Pierre-Yves Barreyre in France believed that in the make or buy decision a distinction should be made between goods and services which an organization was capable of producing itself from those that clearly were outside of its domain. 8,9 He coined the new term, "Impartition" for those requirements which were or could be produced in-house, but for which outside suppliers were chosen. The root verb, "impart," is easily appreciated in English and impartition is probably a better name than outtasking or outsourcing. In outtasking and outsourcing the buy decision gets the nod but it is clearly a form of organizational dismantling. Giorgio Merli used the term "co-makership" to describe the partnering type of relationship required with suppliers to ensure that customer satisfaction, quality and JIT initiatives would be successful. 10 His term of co-making had less to do with outsourcing than the nature of the buyer-supplier relationship. Nevertheless, others have suggested it is exactly this kind of co-makership relation that is essential to ensure outsourcing's success. 11

Information Systems
Many research studies in outsourcing have involved the IS area. Information systems has grabbed the outsourcing spotlight. At least several hundred articles and papers have been written about IS outsourcing and the number is growing daily. Almost every aspect of the IS outsourcing question has been examined and commented upon. This is not surprising given the dollars involved. The Gartner Group estimated that the current worldwide IS outsourcing market was about $45 billion. 12 Neither MIS academics nor practitioners ever mention any involvement of purchasing in the decision making process or implementation. 13,14,15,16,17 Even when a theoretical framework is supplied for MIS outsourcing, the existence of make or buy research from a purchasing perspective is totally ignored. 18 Even so, standard advantages and disadvantages of IS outsourcing are not that different from traditional make or buy arguments. 19 Thus, purchasing academics suffer the same fate as supply practitioners. Although our research did not examine closely other outsourcing areas such as engineering, legal, and financial, the suspicion is that conclusions would not be all that different regarding purchasing's non-presence at the outsourcing table.

Exhibit 1
Evaluation of Outsourcing 19

Advantages of Outsourcing

• Realization of cost savings through economics of scale and consolidations.
• Acquisition of cash through liquidation of computers and the decrease in depreciation expense.
• Access to major and immediate change.
• Realization of economies of scope (efficiencies driven by variety rather than volume).
• Incremental increases in IS resources (as opposed to a step function).
• Access to technology without capital investment.
• Addresses systems integration issues.
• Accommodates business need to downsize.
• Facilitation in cases of leveraged buyouts.
• Access to improved backup and disaster recovery facilities.
• Readily proliferated with acquisitions.
• Converts cost centre within company to profit centre within the vendor's operation.

Disadvantages of Outsourcing that May Favor Internal Improvements

• Loss of control.
• Higher exist barriers.
• Management of the vendor/company alliance.
• Exposure to vendor risks, including: financial strength, loss of commitment to outsourcing, slow implementation, promised features not available, lack of responsiveness, poor daily quality.
• Become hostage to "extra use" charges.
• Difficulties in quantifying economies.
• Costs of conversion.
• Attention required by senior management.
• Supply restrictions.
• Possibility of being tied to obsolete technology.
• Concerns with long-term flexibility and meeting the changing business requirements on a timely basis.

The Public Sector
In the public sector privatization is the major trend. Privatization is to change from public ownership or control to private enterprise. 20

Major head line grabbing privatization initiatives in 1993 included:

• Banque Nationale de Paris (BNP) - $4.8 billion
• J. R. East (railway, Japan) - $9.0 billion
• British Telecom (22%) - $7.9 billion

Around the world over $60 billion of state-owned enterprises were privatized in 1983, bringing the total over the past decade to more than $388 billion with the majority in transportation, energy, and water. 22 On a smaller scale, 1993 privatization examples included: Baltimore's City Life Museum, Norfolk Gardens (Virg.), the San Francisco Zoo and the Mainland County Hospital in Galveston, Texas. 23

Contracting Out
In the US states in 1993 almost 80% of all privatization initiatives occurred in the form of contracting out for state programs and services. The prime reason reported for contracting out was cost savings; others included flexibility and less red tape, lack of agency personnel or expertise, speeding implementation and quality service. Specific contracting out examples in 1993 included: fast food franchises at UCLA, Los Angeles, ambulances in Framingham, Mass., and prison care in Florida and Texas.

The Council of State Governments (CSG), from a major research study involving 50 states, reported that state privatization efforts were expected to expand over the next five years according to 85% of state auditors, budget directors and comptrollers. Case studies show that not all privatization efforts were successful. Four major conclusions were: (1) state managers should address employee displacement issues before privatization of state services or programs; (2) the existence of competition is probably the most important factor for successful privatization; (3) in many if not all cases, private companies can provide services at lower costs without lowering wages; and (4) states should establish statewide policies and procedures for regularly examining potential privatization candidates. 24

Privatization is seen as a cost reduction and downsizing effort. It is strongly supported by those concerned over rising public expenditures, but resisted by public service unions. Some states have passed laws that privatization must result in savings greater than a certain percentage, usually in the 15-20% range before it should be implemented. If privatization occurs as the result of an RFP process, purchasing often gets involved in the issuing of the RFP or the contracting for consultants to advise on the privatization project.

It appears, therefore, that public procurement involvement in its own forms of outsourcing is more extensive than what has been experienced in the private sector thus far.

Purchasing and Outsourcing
Hopefully, in outsourcing the current in-house process, advantages, disadvantages, costs and benefits are well known and form a base against which market options can be prepared. The recent popularity of outsourcing suggests that such benchmarking must have found the performance of the in-house unit wanting. Perhaps it was the glare of the customer satisfaction and competitive spotlights, coupled with tough economic times that finally revealed what must have been significant internal weaknesses for some considerable period of time. It certainly was not the diligent pushing and prodding of the supply department that was the cause for most major outsourcing initiatives. This brings us back to the issue of meaningful involvement.

The traditional argument for elevating supply status in an organization has always focused on the percentage of total revenue spent with suppliers. 25 The higher the percentage, the greater the potential impact of supply savings on the bottom line. Pursuing this line a little further, one would expect that supply should be significantly affected by the outsourcing phenomenon. However, it appears that in many organizations supply has been on the sidelines during this outsourcing phase. Findings from two self-directed research projects also provide a useful insight.

Fleet Managers
The first research study involved fleet managers. This research is still ongoing. Fleet management has some interesting parallels to purchasing. Fleet has a widely varying reporting line including chief executive officer (9.8%), sales/marketing (5.9%), operations (18.6%), personnel (4.9%), finance (14.1%), purchasing (10.6%), and other (36.2%). 26

In the last five years a number of suppliers, primarily leasing companies, have started to offer a total fleet management package, or in our words, to outsource the fleet function. What is evident from this research so far is that purchasing involvement in this issue has been minor at best in any of the stages of initiation, information gathering, analysis and evaluation, decision and implementation. An interesting preliminary finding was that in at least half of the cases studied, the supplier took the initiative and made a pitch to top management directly. When the initiative came from within the organization more than 90% came from areas outside of purchasing or fleet most commonly from a VP of finance or administration.

The Purchasing Manager's Perspective on Outsourcing
Thus far, almost all outsourcing literature and research basically ignored the role of purchasing in this process. Therefore, it seemed to be a logical step to see how purchasing managers themselves felt about their role in outsourcing. A June 1994 pilot survey with 70 Canadian purchasing managers from all parts of the country and all sectors, half public and half private showed that about 70 percent of the organizations represented had been active in outsourcing over the past five years.

Services and products ranked about equally over the past five years, but in the past 12 months both services and products outsourced increased by almost one third and in the next 12 months a further increase of about 40% was expected in services and 20% in products. Of the 19 reasons given for outsourcing, the 7 most common ones were:

• Cost Reduction - 94%
• Process Improvement - 56%
• Access to Knowledge/Expertise - 50%
• Staff Reduction - 40%
• Internal Problems and Inefficiencies - 30%
• Focus on Core Competencies - 28%
• Available Capital Investment - 10%

The really surprising findings dealt with meaningful involvement. Averaging over the past five years, only about 25% of the respondents believed they were meaningfully involved in any outsourcing process. Over the last 12 months this increased to about 45% and over the next 12 months this figure rose to 61%. Thus, a significant change was expected for the future.

When comparing the public to the private sector some further surprises appeared. Meaningful involvement in the public sector outpaced the private sector by at least 20% on the next 12 months, but by at least 50% over the past 12 months and five years.

Is it possible that purchasing's potential contribution to outsourcing is finally recognized, or are our expectations exceeding reality? It would be interesting to find out if a fundamental trend towards greater purchasing involvement is under way. It is clear from actual examples of meaningful purchasing involvement that the issue of buyer-supplier relations may be critical.

Buyer-Supplier Relations in Outsourcing
Since outsourcing involves divestment of an activity formerly performed in-house it can represent a unique kind of purchase. When Epson America Inc. outsourced the design of its action AN700 notebook computer and to Jabil Circuit Inc and AT&T Corp. its Model 5000 Surity teleconferencing system to Group Technologies Corp. they entered into a unique purchaser-supplier relationship. 27 The nature of the communication required, the criticality of the information, the need for frequent, confidential and rapid communication across a number of organizational areas all required a nontraditional, custom designed contractual agreement and supplier-customer relationship which is totally different from the more standard buyer-supplier agreement in a standard product purchase. 28 Purchasers which have experience with partnering type of supplier arrangements may be able to contribute more to outsourcing of strategic and sensitive services than purchasers who lack such experience.

Purchasing Initiative and Outsourcing
It is probably not realistic to expect purchasing to play a lead role in initiating outsourcing in any organization. Outsourcing involves divestiture of co-workers and colleagues, and current users of the purchasing areas services. Internal relationships could be significantly harmed if current requisitioners see purchasing leading the outsourcing parade. Once the decision has been taken to examine a particular area for outsourcing potential, purchasing's involvement in the information gathering at subsequent stages should be easily justified.

Is purchasing then completely excluded from outsourcing? It appears that areas like food services, security, and grounds and maintenance do, at least eventually, migrate to the purchasing sphere, even though, even here, the question of original procurement involvement is not perfectly clear.

CONCLUSION
The conclusion regarding outsourcing must be that it adds to the dollars spent by the organization outside, without increasing significantly the dollars spent by purchasing.

The obvious conclusion is that the procurement area still has a long way to go before it has become fully academically and practically recognized. Its distinct body of knowledge and expertise have been judged inadequate in the outsourcing debate. The forthcoming publication by the Center of Advanced Purchasing Studies and CIPS on the investigation by Harold E. Fearon and William A. Bales in the US and Richard Lamming in the UK on non-traditional purchases will probably reinforce the conclusions reached in this article.

Is it possible that, within the comfortable confines of the supply community, purchasing academics and practitioners have misjudged the extent of the field's progress towards meaningful involvement? Perhaps taken the blinders off and accepting the status quo is a necessary step before further progress towards truly meaningful involvement can be achieved.

REFERENCES

1. Armmer, Dean S., "Top Management's View of the Purchasing Function," Journal of Purchasing and Materials Management, 1974 (reprinted in Spring, 1989).
   
   
2. Bales, William A. and Harold E. Fearon, "CEO's and Presidents' Perception and Expectations of the Purchasing Function," Center for Advanced Purchasing Studies, Tempe, Arizona, 1993.
   
   
3. Dumond, Ellen J., "Moving Toward Value-Based Purchasing," International Journal of Purchasing and Materials Management, Spring, 1994.
   
   
4. Stuart, Gair, "The Acquisition of Equipment in a Research and Development Environment," unpublished doctoral dissertation, Western Business School, The University of Western Ontario, London, Canada, 1989.
   
   
5. Webster, Frederick Jr. and Yoram Wind, Organizational Buying Behavior, Prentice-Hall, Englewood Cliffs, N.J., 1972.
   
   
6. Leenders, Michiel R. and Anna E. Flynn, Value Driven Purchasing: Managing the Key Steps in the Acquisition Process, Irwin, Burr Ridge, Il, 1995, page 1.
   
   
7. Culliton, James W., Make or Buy, 4th reprint, Harvard Business School Division of Research, Boston, 1956.
   
   
8. Barreyre, Pierre-Yves, L'Impartition, Politique Pour Une Entreprise Comp­titive, Hachette, Paris, 1968.
   
   
9. Barreyre, Pierre-Yves, "The Concept of Impartitionø Policies: A Different Approach to Vertical Integration Strategies," Strategic Management Journal, Vol. 9, 1988, pp. 507-520.
   
   
10. Merli, Giorgio, Co-Makership: The New Supply Strategy for Manufacturers, Productivity Press, Cambridge, 1991.
    
    
11. Ristelhueber, Robert, "Contract Manufacturing Outsources Become Part of the Team" Electronic Business Buyer, August 1994, p. 48.
    
    
12. Staples, Sandy, Derrick Neufeld, and Peter Newson, A Note on Information Systems Outsourcing, Western Business School, The University of Western Ontario, London, Canada, 1994.
    
    
13. Benko, C., "Outsourcing Evaluation: A Profitable Process," Information Systems Management, pp. 45-50, Spring 1993.
    
    
14. Huff, S. L., "Outsourcing of Information Services," Business Quarterly, Vol. 54, No. 4, pp. 62-65, 1991.
    
    
15. Lacity, M.D. and R. Hirschheim, "The Information Systems Outsourcing Bandwagon," Sloan Management Review, pp. 73-86, Fall 1993.
    
    
16. Martinsons, M.G., "Outsourcing Information Systems: A Strategic Partnership with Risks," Long Range Planning, Vol. 26, pp. 18-25, June 1993.
    
    
17. McLellan, K., "Outsourcing Core Skills into Non-Equity Alliance Networks," unpublished doctoral dissertation, Western Business School, The University of Western Ontario, 1993.
    
    
18. Lacity, Mary C., and Rudy Hirschheim, Information Systems Outsourcing, Wiley, Chichester, 1993.
    
    
19. Benko, Ibid p. 49.
    
    
20. O'Leary, John (ed). Revitalization '94, Reason Foundation, Los Angeles, 1994.
    
    
21. Privatization in State Government: Options for the Future, The Council of State Governments, Lexington, KY, 1993.
    
    
22. O'Leary, Ibid p. 1.
    
    
23. O'Leary, Ibid p. 14-16.
    
    
24. The Council of State Governments, Ibid p. 8.
    
    
25. Dobler, Donald W., David N. Burt, and Lamar Lee, Jr., Purchasing and Materials Management: Text and Cases, 5th edition, McGraw-Hill, New York, 1990, pp. 10-17.
    
    
26. Nafa's 1988 State of the Profession Salary Survey, National Association of Fleet Administrators, South Merlin, N.J. 1989.
    
    
27. Ristelhueber, Ibid p. 48.
    
    
28. Ristelhueber, Ibid p. 52.