Procurement Outsourcing – Our Hot Topic for March

Our Hot Topic for March is Procurement Outsourcing. Not general procurement of outsourcing services, which would be an enormous topic if we looked at every conceivable outsourced service that the organisation might buy, but rather the issues around outsourcing procurement itself. Or increasingly, outsourcing elements of the procurement function, process or activity.

Now this is something that has really gone from nothing 20 years ago to a huge industry today. But when we look at the market, an immediate problem arises; how do we define procurement outsourcing?

At one extreme, we have organisations outsourcing their entire procurement function, or perhaps all their “indirect” spend – as in the case of the high-profile BAE Systems / Xchanging deal, way back in 2001, that really launched Xchanging into the procurement services world. At the other extreme, we might have a CPO or category manager commissioning a research firm to do a quick analysis of a particular supply market in a certain geographic region. Is that also outsourcing?

Another dilemma when we look at this definitional issue is whether outsourcing has to relate to something that was previously performed in house. That was the traditional definition of outsourcing. An IT activity perhaps used to be done by staff within the organisation; now it is done by IBM or Accenture, and staff may well have been transferred over to that firm.

But what if the activity was simply not being done at all previously? If a firm opens a new office in Australia and decides to buy in procurement services from a local firm that knows the market, is that outsourcing when the buying organisation never had an in house function?

Our answer to that is yes. For the purposes of this debate, that is indeed outsourcing. We consider “outsourcing” to include any services bought from the external market that either were previously carried out internally or feasibly could be carried out internally.

But does that cover too much – pretty much everything we buy? No, there is still a common sense check. We have not “outsourced” our accommodation services, because it was never feasible for us to build and operate our own hotels. We have not outsourced construction of a new office or factory, as we could not feasibly have built it ourselves. However, we might talk about outsourcing the project management of the whole construction project, as we might have kept that in house.

Back to procurement now. Anything we might do ourselves covers pretty much every procurement activity. We can outsource an entire function, or simply some research into markets, suppliers or products; we can outsource the category management and sourcing process; we can outsource any element of the P2P process, from running the IT systems to onboarding suppliers to placing orders; we could even outsource SRM (supplier relationship management) although that seems less likely.

So in part 2 of this introduction, we will look at mapping the different options, and also consider the reasons why an organisation might want to outsource procurement (or indeed pretty much anything else).

And as usual, we invite guest articles on this topic – not just a sales pitch please, but anything you think a smart and pretty well informed procurement audience might find useful, interesting or challenging!

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Voices (5)

  1. Milan Panchmatia:

    I’m not sure I agree with as at all. 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.

  2. Jim Reed:

    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

  3. Jim Reed:

    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

  4. B+t:

    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.

  5. Keith Rowley:

    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.

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