Procurement Outsourcing – current trends and developments (Part 1)

We dived into our series on procurement outsourcing somewhat last week with a guest post and a look at the government shared services approach – so it is about time we stood back and looked at the big question – why procurement outsourcing?

When it was first mooted, it was seen perhaps as not too dis-similar to other BPO type areas. There was a lot of focus on outsourcing the transactional elements of procurement - the perceived “back office” tasks such as processing requisitions and handling invoices. Once we moved into the wonderful world of eProcurement, other tasks such as catalogue management and supplier enablement got added to the list. Savings in these transactional and lower value areas could be made by a “lift and shift/” type strategy – move these activities to a cheaper location, India perhaps.

But in the last couple of years, we’re seeing different trends emerge.  The savings from simple offshoring have declined as wage levels in countries such as India rise rapidly towards western levels. And better technology means that some of the administrative workload can be designed out of the process altogether, rather than merely performed more cheaply elsewhere.  So, for instance, a slick supplier self-service adoption process can take the work away from the customer organisation.

There’s also been a realisation that very few elements of procurement process are fully ‘transactional’, in the sense of being totally repetitive and requiring limited human contact. So even some of what seemed to be low added-value elements of the process turn out to be significant, particularly if things go wrong. It may be a low value requisition to be processed, but if it isn’t done properly, and the CEO doesn't get her 2012 desk diary in time.. the CPO will hear about it!

So we perceive a loss of enthusiasm for treating procurement outsourcing in the same way as other more truly transactional business processes, such as Payroll.  But this doesn't mean that interest has fallen away. Indeed, the factors that created the interest in the first place are as significant as ever.

Organisations are still looking for economies of scale, particularly in spend areas where they aren't a major force in the market. Skills shortages in specialist areas - whether that is for really expert category managers in professional services, IT or Marketing, or procurement technologists who can get the most out of an optimisation or SIM platform, are still with us. And the sheer complexity, scope and scale of the task facing the CPO in a large organisation makes it most unlikely that he or she can do it all with purely internal resources.

So "outsourcing" in some sense is perhaps higher on the agenda than ever. But what has changed is the emergence of different models for procurement outsourcing, compared to the historical simplistic BPO propositions. And we believe the two big trends are these.

1. A desire for more tailored outsourcing models, with clients wanting a model that meets their own needs.  “Customer intimacy” is a phrase buyingTeam used in their guest post last week, and that is certainly something that most clients want. But it is not just ‘intimacy’ in our view – it is the ability for the client organisation to shape the service they receive.

2. Linked to this, but on a slightly different track, procurement leaders now have a much wider range of options to consider. You don’t have to outsource your entire procurement function, or your end to end P2P process. You can outsource on a category basis, or look at all sorts of other elements of the overall procurement process and range of tasks. The range of options is considerable.

Stay tuned for part 2 of this overview - later this week - where we’ll look at these two trends in more detail.

Voices (4)

  1. Tom Lawrence:

    Howard – there’s a different reason why businesses should outsource procurement – and that is that they simply can’t afford to get what they need internally (particularly organisations in the $2-10bn revenue range). So when they outsource, they are not outsourcing something they already have internally – they are outsourcing to get a much better service. Outsourcing, via a shared services model, offers a way to get what you need in an affordable manner.

    And I have to challenge your point around ‘study and understand’ – surely the best person to do that is an expert, be they internal or external. Organisations bring in consultants all the time to do exactly that. When we talk about ‘client intimacy’, what we are recognising is that understanding the real business needs is of paramount importance. As long as an outsourcer recognises that and invests in understanding it, procurement outsourcing can and does succeed.

    Tom Lawrence

  2. Howard Clark:

    You write that

    ‘There’s also been a realisation that very few elements of procurement process are fully ‘transactional’, in the sense of being totally repetitive and requiring limited human contact.’

    In service organisations, there are no true transactional services. In fact when organisations study their services from the customer’s perspective they learn that even services that ‘appear’ simple and transactional actually mask a deeper complexity.

    So service organisations should never outsource any service until they have studied their services and improved them. If not, how would they know if they were outsourcing a services configured to what mattered to customers.

    This is also the reason why you would never want to outsource procurement. If the first step is study and understand, this is always best done by those who run the service (from within the organisation). If left to external procurers, how would they know or understand what was truly important within that particular system?

    Secondly what many service organisations know, is that in services economies of scale is something of a myth. Take for example repairs.

    if you procured a service based upon fixing taps with labour, a procurer would probably try to push down the cost by bundling-up lots together (to achieve scale and reduce costs). Say the cost was pushed down to £20 for a tap repair. Sounds good?

    When you study from the customer’s perspective you often find it can take 10 fixes to solve the problem. Thus a cheap repair (£20) becomes an expensive repair (£200). Transaction (£20 for a tap repair) turns into, please solve my problem permanently.

    If you hadn’t studied your own service to understand performance and what matters, and created measures related to purpose …. well you wouldn’t know.

    This is why outsourcing procurement is dangerous.

    Study always comes first.

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