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  - October 30, 2007 -  

When Does Procurement Process Outsourcing Make Sense?


More Companies are Taking a Look, but Most Look at Indirect and MRO Sourcing, not Direct Materials



SCDigest Editorial Staff

SCDigest Says:
Also, as the world becomes more virtual, supplier selection and management is becoming more strategic not less for most companies, especially in the direct materials area, meaning in general it is less susceptible to outsourcing.

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As with virtually every area of business these days, the procurement process itself has become a target of Business Process Outsourcing, or BPO.

Several very large consulting firms, such as Accenture, IBM Global Services, and AT Kearney, and a few procurement software vendors such as Ariba and IGC Commerce, are now offering outsourced procurement services.

Procurement BPO is Still an Emerging Concept

Despite the recent marketing and promotional activity by those offering Procurement BPO services, a relatively small number of companies have actually engaged such services. Notable examples include the large deal signed in 2006 between IBM and Colgate. (See Procurement Outsourcing Trend Continues, as Colgate-Palmolive Turns Over Many Purchasing Functions to IBM.)

What is Procurement BPO? Research firm Forrester defines it as “the contractual arrangements in which the outsourcing provider manages multiple phases of purchasing — across several categories of goods and services — from spend analysis to vendor selection and sourcing through contract negotiation, supplier enablement, and transaction management, to supplier performance assessment. At the extreme, this can involve managing all phases of the purchasing cycle for the chosen categories of spending.”




Though it can take a number of forms, Procurement BPO will involve the following elements:

  • A long term arrangement of 18 months or more
  • The vendor assuming some level of accountability for outcomes
  • A transfer of responsibility

Where’s the Value?

Like almost all outsourcing alternatives, at its core, Procurement BPO in theory offers the corporation the chance to reduce costs by moving the function to a group with greater size and economies of scale and a strong investment in process excellence. Similarly, Procurement BPO is positioned as offering corporations a chance to shed a function or parts of a function that adds little differentiation to focus on core competencies.

In practice, however, few if any companies completely outsource the procurement function. This is especially true for the purchase of direct materials for manufacturing, or goods for resale by retailers and distributors. Companies are much more likely to consider outsourcing the procurement of indirect materials, MRO items, and some non-strategic services.

As Forrester notes, because Procurement processes will likely be only outsourced in part, in some respects this limits a company’s ability to truly reduce costs, since much of the Procurement infrastructure and supporting technology must remain in place.

Also, as the world becomes more virtual, supplier selection and management is becoming more strategic, not less, for most companies, especially in the direct materials area, meaning in general it is less susceptible to outsourcing.

On this last point, Forrester notes that while for example MRO materials are not strategic, outsourcing procurement of even that category “may also be a lost opportunity to build skill in online sourcing and purchasing on low-risk spend categories like MRO before applying those new skills on the strategic categories where the consequences of a bad choice of suppliers are much more serious.”

Many Procurement BPO providers also claim to be able to reduce the costs of the purchased items themselves. Obviously, this is a critical claim that, if true, might substantially enhance the Procurement BPO value proposition. But does it? Forrester’s take is that the ability to reduce the purchase price of goods beyond a company’s own capabilities would really come from the BPO provider being able to aggregate purchases across several clients.

As Forrester writes: “Sourcing effectiveness comes from three sources: 1) sourcing expertise of knowing how to use online sourcing tools; 2) category expertise about when, what, and who to source from; and 3) aggregation of multiple sources of buying to gain volume discounts. Companies can gain the first category of expertise through training by external consultants and through practice. Companies often have their own category expertise for core spend categories and can use external consultants for other categories. The BPO vendor may or may not have the category expertise in the categories where a company needs help.”

There are Pros and Cons

Forrester and others have identified other risks to companies considering Procurement BPO alternatives. These include:

  • Vendor promises exceed capabilities: Especially true during newly developing market, as Procurement PO is still relatively immature as a discipline.
  • Savings become softer over time: After a few years, the baseline to measure the savings against becomes arbitrary.
  • BPO provider focuses on lowest cost suppliers: If they must demonstrate results on purchase costs, BPO providers would naturally gravitate towards the lowest unit cost providers, which may have poorer quality, service, or total usage costs.

So, should you consider Procurement BPO offerings? Forrester offered the following thoughts:

“The balance of the positives and negatives of procurement BPO suggests that its ideal role is as a transitional solution for reducing the costs of non-strategic goods and services purchases while a company focuses on improving its capabilities in the core spend categories. That way, the company can enjoy the near-term benefits of being able to capture savings in what it is buying in indirect goods but then in the longer run take this back (at a potentially lower cost), leveraging the skills, processes, and technologies that it has implemented for its core spend categories.”

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