Might 2006 be the year that procurement outsourcing crosses the chasm? According to a recent study by the Everest Research Institute, the outsourcing of indirect procurement is growing at 30% per year. According Everest, "unlike most types of BPO (Business Process Outsourcing), the value of procurement outsourcing goes far beyond operational cost savings. Instead, the main value driver for Procurement Outsourcing is the reduction of expenditures on indirect spend categories such as office equipment, travel, and professional services. Such savings are often in the region of 10-15% depending primarily on the rigorous use of strategic sourcing practices, technologies, and organisational adoption. Based on a typical indirect procurement budget of 20 per cent of revenues, PO can deliver savings of up to 2 per cent on the corporate bottom line -- resulting in a 25 per cent profit margin improvement if margin is 8%, and thus as much as a 25 per cent increase in market capitalization."
The release of this report comes immediately after two recent customer wins from IBM in the procurement outsourcing market. In November, IBM announced a deal with to outsource Coty’s indirect procurement operations. Coty is a $3 billion fragrance company. And just this week, IBM announced a procurement outsourcing "transformation" deal with Unilever. This five-year deal will aim to "transform and manage strategic sourcing and procurement operations of indirect materials and services for Unilever’s North American operations."
Here at Spend Matters, I've written about procurement outsourcing in past blogs. And I've long felt that the outsourcing of procurement (either on a targeted category or broad functional basis) is far different from the outsourcing of other areas such as IT or HR. This is because of the potential savings from procurement outsourcing goes far beyond the labor arbitrage and transactional efficiency gains of outsourcing other areas -- and also because of the potential risk to the business. Because of this, it will be fascinating to observe whether traditional outsourcers like IBM and Accenture can continue their momentum compared with functional experts like Ariba and ICG Commerce -- who could argue that their category knowledge should result in even greater sourcing-based savings from outsourcing efforts than their generalist peers. In any event, procurement outsourcing should be a fascinating Spend Management market to watch in 2006 as IBM, Accenture, Ariba, and others battle for the pole position in this nascent sector.