Procurement Outsourcing – Three Dimensions of Opportunity

Hot TopicOur first article related to this month's hot topic, Procurement Outsourcing, brought a veritable blitz of opinionated and well informed comment from some of our regular commentators and some less frequently seen names here (including some people I have huge respect for as outsourcing experts!)

We'll get into those comments, and our responses to some of them, later this week. But to follow up on that post, today we will give a view of the different types of procurement outsourcing that we see in the market, and some thoughts on where the growth is and might be in the near future.

Some 15 years after the real start of procurement outsourcing, it seems clear that few large organisations are likely to outsource procurement in its entity. As some of the comments on our last piece suggested, there are certainly elements of procurement that are (or should be) strategically important to organisations. So why would you outsource that? But equally, it is clear that many organisations are not seeing every aspect of procurement as quite that critical.

There is another view however. Even if we consider procurement as strategically important, could we actually drive competitive advantage (the ultimate aim of pretty much everything a private sector firm does) by outsourcing? I can think of one firm – and this should be public soon – that has made what is in effect a very strategic decision to outsource, not because procurement isn't important, but because it is! However, their view is that the best way of driving strategic benefits from procurement is to call on additional outside support.

But back to what can be and often is outsourced. We can segment it across three dimensions:

The category dimension – many organisations look at outsourcing procurement based on spend categories. That might be a single category (Energy and Fleet are two that often are singled out) or more often a group of categories. The “classic” is outsourcing indirect spend (although we don't actually like the indirect terminology)!

But that is how many of the high-profile outsourcing initiatives were positioned such as BAE Systems with Xchanging, or Morrisons supermarkets and Proxima. The service provider brings – in theory at least – deeper experience of those spend areas than the client has, or believes they can easily develop. There are also less conscious category outsources – the classic being when IT procurement gets wrapped up almost accidentally as part of a wider IT service outsource. (Such deals are often bad news, in our experience, but we will leave that too for another day). However, overall, we see strong potential for further outsourcing growth based on categories.

The process dimension – the other relatively common outsourcing approach is to look at one of more elements of the end-to-end procurement process. That might well cut across multiple categories – slicing the business vertically rather than horizontally, if you like. So we could consider outsourcing supplier onboarding, or even the entire purchase-to-pay process. But the process might also be part of the strategic sourcing cycle. So perhaps the most common type of procurement outsourcing today is to outsource the research element of the category management process – look at the growth of firms such as Smart Cube, Beroe, Procurement Leaders. We believe this will remain a promising area, but some of the more process-based outsourcing – such as onboarding – will decline as technology itself becomes easier to use and processes more automated.

The third dimension is geographic. If a firm opens a new office or business in a country they are not familiar with, there may well be various parts of the operation, including procurement, where it makes sense to use a local, experienced third party to assist or indeed run the whole process. Assuming globalisation generally continues, then this sort of outsourcing should continue to grow as well.

Now none of the above says that outsourcing is a good or a bad thing. But it does provide a framework for considering whether procurement outsourcing might have any merit, and if so, what sort of activities could be considered. And more later this week ...

Voices (2)

  1. RJ:

    Peter, 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.

    1. Peter Smith:

      Absolutely correct, I should add a “fourth dimension” to my analysis. As you say, there is a fine dividing line between consultancy, interim and outsourcing services – and maybe we should explore that a bit more – but they are all certainly related.

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