“The Challenges and Opportunities
associated with Purchasing Outsourcing”
by Jimmy Alyea
Outsourcing of procurement activities
is on the rise and is being broadly adopted across many industry segments
(Morphy, 2012). The current economic
environment has increased interest in purchasing outsourcing as companies look
for new ways to sustain profits through increasing operational efficiencies and
make significant reductions in their cost structures. While outsourcing of HR and F&A (finance
and accounting) is a common practice, procurement outsourcing is becoming
increasingly accepted as a more viable strategy for both cost and performance
improvements. A strategic approach
recognizes that the primary benefit, however, is not in reducing costs of the
procurement organization, but of creating value from corporate spend. Since the early 2000s, leading organizations
have changed their perspective of procurement organization from that of a cost
center to a profit center, which has given a new dimension to procurement
as a “game changer.”
Traditionally, the focus
of procurement outsourcing has been on transactional purchasing activities that
involve select portions of indirect spend. These include processing purchase
requisitions and purchase orders, managing simple RFQs, and invoice matching
and payment. However, the increased availability
of global skills in terms of process and technology has created the opportunity
not only to standardize and automate procurement processes, but also to leverage
improved performance and best-in-class services by moving value-added
activities to a third party specialist. With
companies increasing their focus on core business processes to gain a
competitive advantage, they are more open to outsourcing strategic procurement
efforts such as contract management. Areas
within the procurement process can be categorized as core and non-core
activities and selected ones identified as individual opportunity areas to be
outsourced. The supply base has
developed significantly in recent years and features a number of major service
providers like IBM Global Services and Accenture that are capable of supporting
high-quality outsourced strategic procurement efforts.
With the wide range of service provider skills and offerings
currently available, selecting the right procurement service provider (PSP)
presents a major challenge. There are
many new entrants in this immature and confusing market, and in some cases such
as category-specific specialists, offerings are still under development. While a firm that engages a call-center
vendor can feel secure about the services to be provided, the same cannot be
said of the procurement manager who is considering outsourcing strategic
sourcing or category management. Exercising
“buyer’s caution” is the strategy to be followed when evaluating the specifics
of services offered and vendors’ competencies.
Vendors should be assessed in such areas as category expertise and use
of best practices, technological tools and degree of automation utilized, size
and appropriateness of supplier network, ability to analyze spending patterns
and aggregate spend, level of supplier management provided, track
record/references for handling processes of similar size and scope, and
willingness to sign a carefully constructed Service Agreement (SLA), among
other things.
Just as vendor solutions vary widely, so do contract methods,
and the ultimate success or failure of an outsourcing agreement may very well
lie in the contracting process. A
detailed contract should include SLAs that define responsibilities and
service-level expectations, as well as provide
process-specific metrics and milestones, a clear statement of the value-based pricing
by which solution fees are determined, a dispute resolution process, and an
exit strategy in the event of an unforeseen situation such as bankruptcy. At the present time, there are no
standardized contracts for the three categories of PSPs: transaction-focused providers; category
specialists; and comprehensive service providers, such as IBM and Accenture,
which offer business process outsourcers and procurement specialists. The many different types of procurement contracts
and the variety of options for each provider classification represent a major
challenge in the outsourcing decision and vendor-selection process.
Outsourcing a procurement operation or activity to a PSP
presents other considerations for an organization, such as a need for
transparency in pricing/costing. Depending
on the extent of outsourcing,
significant change management is often required. Firms need to manage carefully the transition
of business processes to PSPs to facilitate continuity and to ensure that
internal employees do not feel threatened and are motivated to make the process
work. Supply management professionals worry
about losing direct contact with suppliers and staying up-to-date on new
procurement technology and current trends in the marketplace. Data integration raises concerns about the
use and ownership of proprietary information and technology. In short, procurement is not as easily
outsourced as other functions because procurement results tie directly into a
firm’s cost of goods sold and profit and loss statement.
Purchased goods and services account for a little more than
half of every dollar of revenue, and 80 percent of their cost is set by the end
of the design and sourcing cycles (Morphy, 2012). Thus, sourcing can provide the single largest opportunity for an
organization to reduce costs.
Procurement outsourcing is well suited to companies faced with increased
global competitive pressures and rising demands to cut costs and improve
shareholder value. Industry research by the Boston-based Aberdeen
Group reports that procurement outsourcing can provide dramatic improvements in
procurement efficiency and effectiveness as follows:
- an increase of 28% in average savings from sourcing
- an increase of 18% in spend under management
- an improvement of 31% in contract compliance
- an increase of 32% in the percentage of suppliers enabled
In addition, operational costs can be reduced 15 to 20
percent through process improvement, staff right-sizing, labor arbitrage, and
achieving economies of scale (qtd. from Huber & Minahan, 2011). Aberdeen’s research into U.S. and European
companies’ sourcing, procurement, and supply management practices indicates
that even the largest firms do not have the skills, expertise, and
infrastructure required to effectively manage procurement across all spending categories. In general, because most companies do not
handle procurement very well when left to their own devices, companies of any
size—small, medium, or large—could utilize some level of procurement
outsourcing to their benefit, particularly for indirect goods and services.
Senior management must realize that viewing procurement
outsourcing as a long-term endeavor and making substantial investments in
sourcing policies will produce tangible results. Adopters
need to assess carefully the comparative costs and risks of insourcing
versus outsourcing specific procurement activities, manage potential risks, and
put sufficient effort into process design and optimization. It is critical for supply management
professionals to understand that outsourcing the management of procurement
activities does not release them from responsibility and that outsourcing
procurement must be managed on a continuous basis. Because the procurement outsourcing market is
a “buyer’s market,” firms should work
with PSPs to devise the solution that best fits their business environment and
strategic objectives.
Copyright 2012. James L. Alyea. All Rights Reserved.
For more information, please contact Jimmy Alyea:
Works Cited
Aberdeen Group.
(2006). You will outsource
procurement: here’s why and how. mThink Knowledge. Retrieved from
http://mthink.com/content/you-will-outsource-procurement- heres-why-and-how
Huber, B. & Minahan.T.
(2011). Procurement
outsourcing: not an all or nothing value
proposition. TPI Information Services
Group. Retrieved from www.tpi.net/.../papers/Ariba-TPI-Procurement-Outsourcing.pdf
Morphy, E. (2012, July 27). Latest trend in SCM: outsourcing procurement. E-Commerce
Times. Retrieved from http://www.crmbuyer.com/story/19783.html
