New Research: What to Staff vs. Outsource — Internal and External Procurement Service Provision

My colleague Peter Smith has been beating hard on the research drum of late. His latest paper is available for download here: Balancing Internal and External Service Provision -- Key Decisions for Procurement Professionals. This is one of the more generalized and observant papers Spend Matters has published over the years that accomplishes far more in scope than we usually set out to achieve in narrow studies and briefs. As Peter notes, this paper contains important and broader messages, including the challenge and opportunity of optimizing the use of resources from both inside and outside the organization, blending them successfully to achieve their goals.

If we go back 30 years or so to the beginning of Peter's career in procurement and when I was kid growing up in the early days of Reagan and Thatcher -- how we both miss those times -- virtually everything from the function or department was done by the internal staff of the organization. There was little in the way of automation or IT tools; management consultants were still a fairly exotic breed; and while there were other professional service providers in certain business areas already well established (such as consumer market research firms), there was little of that nature in the procurement space! It's shocking how much has changed in just a few decades.

But change has been gradual throughout much of this period. There are now wide ranges of providers, all positioned to assist procurement executives achieve their aims. However, in recent years, some commentators have suffered from over-excitement about trends, and proclaimed that full procurement outsourcing was 'about to take off'. The reasons given by analysts for this statement have always seemed convincing: economies of scale, allowing organizations to focus on core business, and others.

Having identified the potential activities that could be sourced from third parties, Peter suggests in the paper that the next step is to assess which would show the greatest benefits if that step were taken. These questions should include probing on the following areas: How strong is the current internal capability in that activity? Is there potential for improving capability if it is not currently meeting needs? How well-developed and capable is the market for external provision of that service? Are there clear benefits (direct cost saving or clear impact on procurement performance) from external provision because of the provider's capability or the effect of aggregation? Will we give up the chance of gaining competitive advantage if we source externally? What are the practical issues around moving to external provision -- cost, effect on staff, etc.?

Today, there are many options for external service provision to supplement activities performed by the internal procurement function, and the range of providers available across most areas of interest is growing. Services which can be provided from external sources cover everything from outsourcing of specific spend categories, partial or total P2P outsource, or newer areas such as Supplier Information Management.

Given this, we make a number of observations in the paper:

  • External provision can bring a number of benefits, ranging from taking advantage of provider economies of scale or labor arbitrage, to utilization of scarce expertise
  • Given this, an absolutely central role for the CPO is to optimize the blend of activities performed internally and those delivered by external providers, across the whole procurement eco- system. CPOs should be analyzing activities in a structured manner to develop, and then regularly review, their strategy for achieving this optimal blend of service provision

Yet provisioning services and knowledge is not the same as provisioning telecom services. Figuring out the best means of accessing the expertise, skills and general capabilities to manage the function versus a particular category is critical given the overall leverage it afford the function, not just a singular area.

In the analysis, Peter suggests that Supplier Information Management (SIM) is just one of the areas that companies should consider ripe for outsourcing or BPO-type services in various degrees. For some, this choice may involve the complete outsourcing of aspects of the role to third parties. For others, it may involve joining or leveraging a supplier network or something more limited that still creates at least limited new efficiencies. In support of the argument that SIM should be outsourced (in whole or in part), Peter makes the argument that providers in this field have the opportunity to leverage their work across multiple clients -- and obtaining reliable supplier information is time-consuming and therefore expensive, so spreading that cost makes sense.

Moreover, much of what is needed is common to all the potential buyers who may be interested in a certain supplier. So the economies of scale are obvious in terms of engaging a provider who can aggregate their clients' requirements in the SIM field. In addition, linked to this point is the geographically dispersed nature of most large organization's supply chains. The work to gather the data therefore becomes even more onerous for any individual organization, as the suppliers are likely to be domiciled in a wide range of countries around the world.

If you're curious to get Peter's quite unique -- I certainly learned something reading his analysis and thought process -- perspective on these topics in more detail, you can download this research brief today if you register on Spend Matters: Balancing Internal and External Service Provision -- Key Decisions for Procurement Professionals. In addition, we check out the following Spend Matters papers that cover supplier management and BPO topics as well.

Supplier Management
Supplier Information Management Technology Fundamentals -- Part One
Leveraging Supplier Management Platforms for Multiple Goals: Risk Reduction, Supplier Diversity and CSR
Supply Risk Management – Segmenting the Technology and Content Landscape and Choosing the Right Category of Solutions
Beyond Basic Scorecarding – Supplier Performance and Development Approaches to Drive Competitive Cost and Risk Advantages
Supplier Management Market Observations: Recent Trending, Musings on SAP's Core Offering and General Deployment Pitfalls (for all Solutions) to Avoid
Accurate Supplier Data Creates Savings for Pharmaceutical Shared Service

Getting Past the Existential Connectivity Funk: Stop Waiting for the Supplier Network Revolution
Developing and Maintaining Accurate Supplier Data: Lessons from Personal Hygiene to Overcome Dirty Supplier Information in Finance and Procurement
Sourcing, Contract Management, and Supplier Management Cloud – Business Users Benefit From Savings Enablement

Business Process Outsourcing (BPO)
Designing an Optimal Procurement BPO Program: Process Expertise and Realized Improvement
Tips for Making the Promised BPO Benefits Real -- Alignment, Focus and Integration
Trapped by Procurement BPO? How to Pull Your Organization Out of the Mire

- Jason Busch

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