Direct Spend to See an Increase in Outsourcing: Report

A new report from Texas-based research firm Everest Group analyzes the factors contributing to suboptimal direct spend management.

The report — “Is It Time to Outsource Direct Spend Categories?” — aims to provide a process for enterprises to begin changing their approach to direct spend management.

In recent decades, Everest Group explains, the procurement function has evolved as enterprises have streamlined their processes for buying goods and services.

The research notes that procurement was once a core function in which a buyer bought the required material and coordinated with suppliers. However, the firm said it has found that because relationships with suppliers can be complex, many enterprises involve their suppliers in product design and development, but fail to leverage these relationships to reap their full benefits.

With enterprises unable or unaware of such benefits, the firm said vendor on-boarding timeframes can often become elongated, leading to inefficiencies such as supplier management tools being limited. Enterprises also may not be adequately rewarding suppliers for providing innovative ideas, the firm said.

Another factor that has led to the more recent evolution of procurement methods has been the trend of companies appointing chief procurement officers (CPOs), adopting strategic approaches with suppliers and outsourcing procurement needs to use third-party expertise.

“Most of these changes have focused on the low-hanging fruit in indirect procurement,” Everest Group said. “Direct spend has seen less change for a variety of reasons: It has its own set of challenging, complex and elaborate processes.”

The report suggests that indirect materials procurement has been open to the adoption and implementation of new technology. However, the firm says direct materials procurement has, for the most part, not kept pace. This can lead enterprises to rely on legacy technology solutions that focus on cost reduction but offer little to no risk management capabilities, Everest Group said.

(See related coverage: Is Direct Materials Procurement a Separate Technology Market in North America?)

It explained that there are many cross-border suppliers, trade and logistics risks and several stakeholders to manage at each level of the procurement process. These factors can leave the direct spend space dealing with inefficiencies as a result of large amount of untapped potential, the research firm said. According to the report, just 14% of all procurement outsourcing contracts include direct categories.

“Enterprises perceive direct spend to be a core function and are reluctant to make changes,” Everest Group states. “This is where third-party technology and process expertise can help by mitigating these concerns and guiding enterprises on a transformation journey to innovate direct spend management.”

In the firm’s report, Everest Group analyzes the differences between direct and indirect procurement, exploring the difficulties regarding direct spend management. The new report also explains what the firm says are the benefits of tapping into external expertise, in addition to discussing the key issues that CPOs may want to consider when planning to outsource direct spend.

The report suggests that enterprises are at an important stage in their procurement process.

Enterprises “must adapt to rapidly changing market dynamics to keep their business operations relevant,” the firm states. “In doing so, many have optimized their indirect procurement operations; however, direct spend management optimization lags, as transforming that area is perceived as posing greater risks and challenges.”

Challenges in direct spend management also highlight a need for transformation, Everest Group explained.

“People, process, technology and supplier issues are making cost savings and risk management difficult,” it said, adding that such challenges — in addition to the need to increase digitalization, reduce risks and boost spend visibility and control — are pushing CPOs to consider outsourcing such activities.

The firm said progress regarding the evolving procurement process is slow, though Everest Group said it is accelerating.

While service providers continue to invest in developing direct category management capabilities, the firm said providers are also working to facilitate holistic technology platforms.

“We expect a rapid increase in outsourcing of direct spend,” the firm concluded.

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