Procurement Outsourcing – Readers’ Comments and Thoughts on Strategy

Hot Topic

We are featuring Procurement outsourcing as our Hot Topic for this month, and today we wanted to take a look at the comments from readers that previous articles have stimulated, and respond to some of those.

Let’s start with a comment from RJ on our article about the three dimensions of procurement outsourcing – we agree with him completely by the way.

I think that there is also a fourth dimension of project-based outsourcing. Whilst this is often the domain of the contract or interim market, an outsourced provider can also provide depth of experience and capability in managing complex or sensitive projects, particularly in categories that are infrequently covered by in-house resources. I know that you might consider this “consultancy” or “project management” work rather than outsourcing but it’s an important source of revenue for the providers.

Then we have the main debate – should you outsource procurement? Or even, can you outsource procurement? Keith Rowley kicked us off.

Any outsource should follow the same principles whether procurement or any other service. The first has to be you don’t outsource a problem. Second you must take time to ensure you define the service you are outsourcing. Personally I think outsourcing can be very useful if you are meeting these principles and you invest time and effort in defining what business need you are addressing and why you are outsourcing. You also must ensure you have the resources to manage the contract and service. Personally I am against outsourcing the CPO role - like other CXO roles I believe this is far to strategic and important to the core of the organisation for it to be outsourced. If you are not taking a strategic view of your supply chain and are outsourcing this then I think you are outsourcing your crown jewels and most likely a differentiator of your organisation.

I tend to agree when it comes to the CPO role, but more later on what we can and can’t outsource. B+T (the commentator formally known as Bitter & Twisted) chipped in with his / her usual brevity.

You can’t outsource purchasing. Purchasing is what organisations do – Buy stuff: do something to it: sell it / use it. What you can do is radically aggregate vendors, or, change the logo on your purchasers payslips. If this doesn’t sound sexy enough, well don’t do it then.

Jim Reed wasn’t sure he agreed with that.

It depends what you mean by purchasing. My definition of purchasing is requisition -order placement-GRN – pay. I think you can outsource that process and a lot of companies do. Procurement is about buying, competing, negotiating, sourcing and aligning the supply chain to the demand. I agree you shouldn’t outsource that.

He then continued, taking the argument further.

My issue with outsourcing procurement is that whilst transactional procurement is a relatively simple repeatable and portable task and can therefore be outsourced, strategic procurement inevitably plugs the supply chain into transformational projects and business enablers. It therefore has a wide knowledge of the business dynamics, drivers and the cost breakdown and it can, if well executed and supported, deliver real competitive advantage. Whenever I have looked at whether to outsource, knowledge based processes and sources of competitive advantage are things you do not outsource.

But not everyone agreed with that - Milan Panchmatia included.

I’m not sure I agree with this .... You can definitely outsource Procurement - whether this is indirect goods and services or direct goods. Utilising specialist procurement companies who have deep levels of expertise either in a particular sector or category can deliver massive benefits to the client company. Well constructed outsourcing agreements focus on not only the cost of goods but also driving best practice into the organisation.

So let’s stick with that big question of whether you can and should outsource the more strategic elements of procurement. Well, for a start, it is likely that not all procurement activity is going to be a true source of competitive strategic advantage for most organisations.

And even if you decided procurement should or could be a source of advantage, what if outsourcing is the best way of achieving that? I’m not saying for a moment that this is true for everyone, but if you were an organisation with a very weak procurement function, poor processes, non-existent systems, then you might have a tricky decision to make. Do you invest time, resource and effort into getting to the point where you have a function that might deliver that advantage, or do you look at outsourcing?

In practice, what we are seeing is a combination of reasons for outsourcing. Many firms who use outsourcing are picking elements of the overall procurement activity – as we said here, that might be parts of the processes, like the transactional elements that Jim Reed described. Or it might be certain categories, or particular projects.

But that can reflect either a recognition that these aren’t the areas that are likely to generate advantage, or they reflect the difficulty of building deep expertise - in every category area for instance. Even if you think that buying energy has the potential to give you competitive advantage, that might be better realised by getting Proxima, Accenture, Xchanging, 4C, Optimum or whoever to do it rather than trying to build an expert team yourself. I agree that usually organisations are more likely to outsource non-strategic activities and it is lower risk; but we would argue there are exceptions where outsourcing is in itself the best answer to generating strategic advantage.

First Voice

  1. David Atkinson:

    SURE, you can outsource procurement, especially if you want to forget two things:

    1. That procurement is a core competence of your business, and it’s only going to become more core as you and your colleagues jump on the bandwagon and outsource anything that moves, and….

    2. That 90% of the cost is designed-in to your products and services by those responsible for the specification. That brilliant procurement (including SRM) is about getting suppliers involved incredibly early in the design/specification process, so that existing assumptions and paradigms can be challenged for the benefit of the whole company and its customers. To even have an outside chance of doing this, you need extraordinarily good relations and co-ordination with your internal colleagues; something a provider of procurement-as-a-service has a lousy chance of achieving.

    If you see procurement as ‘shopping’, then sure, outsource it (you’ll never be fired for copying everyone else, will you?). If you see procurement as a core business process, then send the PAAS suppliers away along with their over-optimistic ‘savings’ estimates.

    Give me strength.

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