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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

July 20, 2011


Supply Chain News: Procurement Outsourcing Growth Has Never Really Reached Predicted Levels

 

Procurement Processes Connect to Directly to Bottom Line to be Easily Given Up, AT Kearney Says

 

SDigest Editorial Staff 

 

For the last 5 or 6 years, many studies and pundits have predicted rapid growth for "procurement outsourcing." While the market continues to grow and evolve, it has still yet to take off the way many predicted it would just a few years ago.

Why? Maybe because it is just very hard to do.

SCDigest Says:

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"It is difficult to envision it expanding to all indirect spend areas across companies, let alone into direct spend," the Kearney report says. "Expectations that procurement outsourcing will achieve high growth over the next several years may need to be tamped down."
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Procurement outsourcing involves the outsourcing of parts or all of a company'sprocurement functions (people, processes, systems, and expenditures) to an external service provider. Not long after the concept started to gain some level of critical mass, a 2007 study by the analysts at The Black Book of Procurement Outsourcing predicted growth rates of 37% for 2008 in the US, and similarly impressive numbers for subsequent years. Most later analyses said those numbers were not closed to being reached.

The consultants at AT Kearney earlier this year forecast a procurement outsourcing growth rate of 12.4% this year and 12% in 2012 (up from 10.6% in 2010 and just 6.6% in 2009). These are decent growth numbers, but not the turbo growth earlier studies had predicted when the concept of outsourcing was first coming to procurement as it long ago had to IT, logistics, and many other functions.

In a report it released earlier this year, Kearney noted that "As far back as 1999, in A.T. Kearney's Assessment of Excellence in Procurement study, executives said they expected to increase their outsourcing of day-to-day procurement activities significantly, and deploy more strategically managed consortia. Yet more than a decade later, procurement outsourcing continues to trail outsourcing in other functions."

Kearney nicely quantifies the gap between predictions for procurement outsourcing growth a few years ago and the reality today, as seen in the graphic below. For example, 40% of respondents to a 2007 Kearney survey expected to be outsourcing at least some operational procurement activities by 2010.

Instead, the actual number last year was just 14%. Not only was that well below the forecast in 2007, the actual percent of companies outsourcing at that level in 2010 was only 4 percentage points above the 2007 figure (10% to 14%).

 

Source: AT Kearney

 

Kearney notes that procurement activities and effectiveness - whether for direct or indirect materials and services - have a very direct connection to the bottom line, and that as a result "companies are careful not to lose their grip on this important function."

(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

Learn More about Softeon's Innovative Supply Chain Solutions

 

The fact that direct materials purchasing often takes special expertise and has a clear link to the critical measure of cost of goods sold has in practice generally limited procurement outsourcing to indirect materials and services (goods not directly used in manufacturing, and services such as travel, legal, etc.)

"It is difficult to envision it expanding to all indirect spend areas across companies, let alone into direct spend," the Kearney report says. "Expectations that procurement outsourcing will achieve high growth over the next several years may need to be tamped down."

In fact, there are some trends indicating movement in the other direction. Kearney says it is aware of several companies that have recently started the process of backing out of or renegotiating procurement outsourcing deals they had signed just a few years ago.

Kearney cites the example of a large multinational retailer that has determined it has not achieved the significant benefits it expected from outsourcing most of its indirect purchasing spend. A global telecommunications company that "mixed" procurement into a broad outsourcing contract recently concluded that it was paying too much for average results.

Kearney says both companies "now recognize that their due diligence efforts during the vendor selection and contracting processes were less than adequate."

Interestingly, Kearney says one of the keys to procurement outsourcing success is that the company is already very skilled in the procurement function. That implies a company cannot wave a magic wand over internal procurement challenges and make them just disappear through outsourcing the function.

Another common trait among companies with successful procurement outsourcing strategies is that they start with initiatives that are smaller in scope and more specific, "encompassing a relative handful of procurement processes or sourcing categories and expanding only if these "pilot" efforts succeed," Kearney says.

Also interestingly, Kearney says the sweet spot for procurement outsourcing may be companies in the $1-5 billion revenue range. These companies have a relative large spend but may not have invested as much in developing procurement talent and processes that most larger companies have.

Procurement outsourcing is unique when compared to the many other types of business process outsourcing (BPO), "as it does not come with the baked-in guarantees that vendors usually deliver in other functions," Kearney concludes. "An early willingness to share spend data and an honest assessment of present-day capabilities is a must during the vendor selection process. Where a capability is found to be lacking, the question then is whether it can be improved through an internally focused effort or by outsourcing."

Do you agree procurement process outsourcing hasn't really taken off as many predicted? Do you agree with Kearney's assessment as to why? Is the medium sized company perhaps the sweet spot for procurement outsourcing? Let us know your thoughts at the Feedback button below.


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Recent Feedback

2011-07-24

 


Fantastic article!

I work in the PO industry and I have seen, firsthand, the challenges that this article discusses.

My own, personal, opinion is that the current offerings that PO providers try to sell to potential clients have to change as these are hampering the take up of services.  Many clients who have developed their own, internal, procurement expertise need solutions to address the `tail` spend that they have probably failed to go after. I don`t see a credible `tail management` solution being offered by anyone even though this would provide a great way to open the door to new clients. 

There are many areas of the PO offering that need to be developed to help drive uptake but, even with improved offerings I don`t see the industry developing at anywhere near the pace that some commentators think it will.

Dan Jeffries

 

 
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