Procurement Outsourcing – the Finer Points of the Opportunity

Procurement outsourcing is in the ascendency. The Everest 2011 Procurement Outsourcing Annual Report suggests 2010 was the best year ever for Procurement Outsourcing with new contract signings and extensions. They indicated that 2011 will be an even stronger year, expecting the market to grow by 15-20%. In my experience, procurement outsourcing is an oxymoron. Procurement is about securing the inputs to a business and, according to Michael Porter in his book Competitive Strategy, is an important aspect to remaining competitive and effective; so why outsource the procurement service? Surely by outsourcing the procurement service a business is putting at arm’s length its buying capability in favour of cost-related benefits, whilst reducing the opportunity for intuitive and innovative buying, which may omit value, innovation and competitive advantage. I’m not advocating either the insourcing or outsourcing of a procurement service; there is always a bit of grey in the middle. I have recently become involved in a procurement outsourcing. The business concerned decided to outsource its procurement function as part of a back office business process outsourcing exercise. This function included direct (buying in products and services which contribute to effectiveness) and indirect (back office products and services) procurement. Interestingly, the specification was some 20 pages of tightly specified requirements which will form the basis of the contract schedule. Upon analysis, it seems the requirement was more detailed and demanding than the existing service - suggesting the function was being outsourced because it was not working. Half way through the outsourcing process, it transpired that a "commissioning" function was being established to manage the contracts and "other strategic" procurement and supplier management opportunities, and that some staff are moving out of scope back into the business. So here we have the outsourcing of a procurement function to a very detailed specification and at the same time the creation of a second "strategic commissioning function". It begs the question: What is this all about and is there a better way? Convention suggests the benefits of an outsourced procurement are all or some of the following, each having a very identifiable KPI: Cost savings. Increased visibility of spend. Increased compliance to agreed contract terms. Standardisation of terms and conditions. Efficiency gains on the procure-to-pay process. Reduction in supplier numbers and volumes of transactions. Given remuneration to suppliers of an outsourced procurement service is invariably a gain-share model, what incentive is there to ensure the buying business is getting real value for its business critical inputs? The finer point of procurement outsourcing requires the board level to understand how and why it is buying the inputs to its business. Just as there is a branding, marketing, and sales front line to a business, so there needs to be the equivalent boundary responsible for the business inputs. The commercial acumen of a procurement (and supplier management) function should bring to a business suggests it should not be outsourced. Maybe a carefully planned and blended operation will deliver the best of both sourcing approaches. I firmly believe a single commercial function providing a service to the business to ensure it secures the best value is a business critical activity which can only be managed internally. That said, it is possible for the procurement function to outsource aspects of procurement which are non-core or indirect. Commercial acumen, knowledge of the market and supplier management expertise is still required by the business to manage an outsourced procurement partner and the specialist needs of the business where value add is critical. Outsourcing the procurement (and the supplier management) of back office products and services where the KPIs listed above are the key measure of success has the potential to be valuable. Where it makes less sense is in the management of outsourcing deals, business critical supply, and where close partnerships bring value adding collaboration. A business must be in control of its buying. The best permutation is a partnership between an outsourcing procurement provider for tactical spend focused on cost savings, efficiency and compliance, which runs complementary to a strategic function very closely aligned to business strategy and the core business, with an ability to leverage the market for its value add. Everest predicts the procurement outsourcing market to rise to around $175 billion of spend on behalf of businesses within the next few years. Clearly, procurement outsourcing is not going away. There is however a case to be made for strategically evaluating options, and looking for a blended approach to ensure the finer points of the opportunity are understood and both cost saving and competitive advantage are secured. [eventpdf]

Procurement Outsourcing – the Finer Points of the Opportunity

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