Procurement activity has peaked in developed economies (part 2)

- November 15, 2012 4:47 AM
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We explained in the first part of this series why the growth in outsourcing and vertical “dis-integration” of supply chains over the last 40 years has led to a multiplier effect in terms of the procurement workload through the supply chain. That in turn has driven the impressive growth of the procurement profession and associated industries.

So, why might that trend be at a point of inflexion? Has the growth stopped, and might it even start going the other direction? That seems very likely.

Firstly, there must be some sort of limit on the whole process or outsourcing – organisations cannot outsource 100% of their activity, or at least if they do, it’s impossible for them to create sustainable added value. (Could Ford totally outsource the manufacture of cars and become simply a marketing organisation? Yes, but one assumes that might not be a good move from a competition standpoint). So we might assume that there is some point beyond which organisations generally cannot go in terms of that percentage of revenues that is accounted for by third-party spend.

We might argue Apple have gone about as far as anyone can in this regard, keeping product design and marketing as their vital in-house competencies and indeed outsourcing manufacturing almost totally. But maybe this illustrates our point- the firms that can do this are already there. It’s hard to see how Apple could increase that percentage of revenues going to third party suppliers.

Secondly, the supply chain risk profile has begun to turn in favour of having greater control over the supply chain. I don’t see us returning to the Henry Ford vertical integration days, but the risk and control arguments are becoming more thoughtful after some decades where the  “outsource everything” mantra was dominant. So we are seeing a more generally critical mood afoot in terms of assessing the benefits of outsourcing. They may be no more than straws in the wind, but some high profile rejections of outsourcing in the UK public sector, and BT’s announcement that they are bringing facilities management services back in house may indicate at the very least a more diligent examination of the business case for outsourcing.

And finally, and perhaps most importantly, the reducing cost advantage associated with off shoring will make many organisations in Europe and the US look again at supply chain and sourcing decisions. And if you’re going to buy components or part finished goods from down the road instead of China, then you may at least consider whether you should produce them yourself rather than buying from a third party.

So if our hypothesis is correct, that percentage of revenues going to third party suppliers won’t grow, and may even start to decline. That will obviously reduce procurement workload. But, I hear you say, there are still many category spend areas that procurement don’t influence within organisations. Won’t that be our major source of growth over the next 10 years, as we continue our push to increase our traction over non-traditional and indirect areas?

We’ll look at that in part 3.

 

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Comments

  • Ed Cross:

    Peter, an interesting perspective, and in business nothing ever stays the same, change is inevitable beit in offering or growth rates / declines.

    However I question two assumptions that may unpin the thinking, the first that everything that can be outsourced in terms of the current reference point (services avaialble) has been and secondly that new services will not appear – just as procurement outsourcing has in the last decade. If you take this argument forward with reference to procurement outsourcing the percentage of spend outsourced in the biggest market (USA) for the service is in the very low percentage points relative to the $trillions spent.

    Also it is worth looking at the East in terms of outsourcing, their focus has not been on labour arbitrage for BPO it has been on capability and technology acquisition. Outsourcing is used as a strategic option instead. Perhaps as technologies and so forth develop, the West will increasingly follow the East’s example?

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