Improvements needed in external resource management

Silo-based purchase management doesn't get the job done, says Dr. Kari Iloranta.

Heidi Hammarsten, 28.08.2015

In the Finnish industrial sector, management teams are overlooking up to 80 percent of their operations if they neglect external resources. Silo-based purchase management doesn't get the job done, says Dr. Kari Iloranta.

In just a few decades, cost structures in the industrial sector have been turned on their head. Where outsourcing once accounted for around 20 percent of turnover, the opposite is now true: internal resources account for just 20 percent or less of costs, with the other 80 percent coming from outside.

"When you ask executives about this cost structure, they estimate the share of outsourcing to be 30 percent, which covers the visible costs associated with direct purchases only. They take no account of indirect purchases and various services, such as marketing, ICT management, premises, estate management, HR systems and banking services," says Dr. Kari Iloranta.

Iloranta is completing a PhD thesis on external resource management for Aalto University. He is also a business coach and has written a book on the subject.

External resource management is characterized by this distorted and outdated idea held by executives. When no one understands the importance of the issue, they view it as a purchasing management matter and delegate it.

Fordism is alive and kicking

"Because executives don't appreciate how important it is, external resource management is being downplayed and starved of resources and investment. In many cases, senior managers still base their thinking on the Fordist mass production model of a century ago," comments Iloranta.

Investment in this area can improve the bottom line by 10 to 20 percent."

"The entire management team needs to be aware of the strategic importance of external resources. Investment in this area can improve the bottom line by 10 to 20 percent. But this can't be achieved through competitive tendering and wrangling over prices."

Iloranta points out that efficient external resource management requires changes in both thinking and organizational models.

"Just look at startups – very few have production-oriented organizations."

Networks instead of production chains

 The traditional image of the production chain is the wrong place to start – it leads into the blind alley of thinking about how to optimize the various links in the chain through trimming. 

"Nowadays, we're really talking about an external resource network. You have to start thinking about how to identify the best elements, get them to work together and how to innovate alongside them. A company is really an integration node where a wide range of resources are brought together."

As well as understanding the importance of external resources in general, management teams need special skills in the area.

In most cases, the answer is that nobody specializes in the management of 80 percent of a company's resources."

"How many management teams have even one person who has any training in modern purchasing operations? In most cases, the answer is that nobody specializes in the management of 80 percent of a company's resources. The same goes for Boards of Directors."

Careful segmentation of various external resources to create a manageable whole lies at the heart of modern purchasing. For the purchaser, segmentation differentiates strategically important purchases from routine ones, large-volume buys from small-volume purchases, and genuinely competitive from seller's markets.

"The result is a matrix, with traditional purchasing accounting for only a small part. Genuine competition occurs in just a small area of the supplier market and switching suppliers is easy."

How to exploit the global supplier market?

Iloranta points out that the issue of how each company can get the most out of international supplier markets is a key question in strategic external resource management.

"You should seek suppliers in a professional manner from around the world, rather than just sticking with familiar providers. Taking account of each market and competitive environment is also part of the new way of thinking. It makes sense to try and maintain continuous competition between suppliers. On the other hand, you should never forget the importance of open cooperation in all human interaction."

All key improvements involve the re-evaluation of needs."

Companies also need to re-evaluate their own needs proactively.

"All key improvements involve the re-evaluation of needs: what does the customer need, what should we do ourselves and what's on offer externally."

Product development should be involved in this conversation.

"Product development should be in the mix when figuring out how to combine the customer's needs with the company's own strengths and expertise, and opportunities in the supplier market."

Dr. Kari Iloranta works as a researcher at Aalto University. He has has held general management positions within several industries and leadership roles in top international consulting companies.

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