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.