Procurement outsourcing is not a new practice, and businesses have been engaging third-party service providers for years now. In fact, more and more enterprises are outsourcing their procurement function — the global procurement outsourcing market was valued at $2,820 million in 2018 and is expected to touch $5,500 million by the end of 2024, expanding at a CAGR of 11.8 percent between 2019 and 2024. However, most of this has been limited to the domain of indirect spend so far.
Historically, businesses are more willing to outsource procurement operations when it comes to indirect spend — primarily due to the relatively large number of suppliers, transactions and categories that need more focused resources that are difficult to manage in-house. For years now, indirect procurement has benefited from new technologies, new practices and third-party procurement outsourcing services providers.
Direct spend, on the other hand, has remained in-house. Though direct procurement makes up for 70 to 80 percent of an organization’s spend, businesses opt mostly for indirect procurement outsourcing, which comprises 20-30 percent of their total spend.
As of 2017, the total indirect procurement spend outsourced stood around $450-500 billion, growing at just under 15 percent year on year, according to a research report by the Everest Group. But of the 1,000-plus procurement outsourcing contracts in place, only 14 percent included direct categories.
The huge potential for outsourcing direct materials has stayed untapped. But global outsourcing trends are changing as enterprises are now, more than ever, in urgent need of adapting quickly to volatile global marketplaces. As markets and demand patterns become more complex, it is becoming difficult to maintain in-house expertise in all areas of the business. They need their procurement function to keep up and stay on top of things, driving innovations and efficiencies, cutting costs, speeding up turnaround times, improving risk management, and scaling up profits. What faster way to achieve this than by partnering with a capable procurement outsourcing provider?
Process Standardization: Direct material outsourcing gives organizations the opportunity to improve efficiency in an area that has seen limited change. Enterprises looking to streamline their procurement function can benefit from bringing in third-party providers who can put in place processes and best practices. Standardizing processes, along with centralizing technologies and operations, can lead to significant savings. Purchasing outsourcing services also simplifies the process for internal stakeholders who then need to deal with a single point of contact rather than manage multiple suppliers.
Spend Visibility and Control: One of the key procurement outsourcing benefits is gaining better visibility over spend. Improved visibility allows for better direction and control. Often, it’s easier to rope in a third-party provider to enforce contract and process compliance, and thus manage spend more efficiently, than try to bring about those changes from within.
Improved Technology and Analytics: Businesses looking at unifying and digitizing various functions within direct procurement will benefit from third-party consultants who can offer unified solutions that treat sourcing, supplier management, category management and spend analysis as part of one integrated platform. Organizations can overhaul their procurement function and get access to a cloud-based software, new technologies, big data, advanced analytics and reporting tools without big-ticket upgrades.
Expertise and Experience: Not many organizations will have in-house expertise in every area of procurement. At the same time, keeping pace with a fast-evolving market is tough, and businesses can overcome these challenges by outsourcing. Businesses stand to gain from the specialized skills, market intelligence, supply networks and market leverage that third-party providers bring to the table. This translates to higher discounts, better negotiation power, favorable contracts and improved analysis. While this will also give the internal team time to focus on strategic, core activities, more importantly, it will give the team the opportunity to learn from seasoned procurement specialists.
Businesses will, however, gain from procurement process outsourcing only if they go about it methodically. Here are four steps you can take to ensure that you get the most value from your procurement outsourcing engagements.
Step 1: Analyze Your Business Needs and Set Goals
- What areas in procurement do you want to streamline or improve through third-party solutions? Are you looking for point solutions or end-to-end procure-to-pay outsourcing? Decide the level of control you want to retain.
- Why do you want to outsource the identified function/s? What’s the impact of not outsourcing it?
- Do you want to outsource transactional functions (invoice management, order processing, etc.) by signing up for procurement BPO services, or strategic ones (contract negotiation, vendor selection, etc.)? What are your procurement outsourcing strategies?
- What do you aim to achieve through outsourcing? Set goals that you want to achieve.
Once these questions have been answered satisfactorily, and the organization decides to outsource, you can move to the next stage in the procurement outsourcing process.
Step 2: Involve the Stakeholders
Outsourcing procurement functions will affect not just the procurement team but everyone involved in the supply chain, from manufacturing operations to logistics providers. It will be a big change, and unless you want to burn the bridges (with external parties) and deal with conflicts (with internal users), imposing a decision arbitrarily will not benefit the business. Rope in the concerned stakeholders, form a multi-departmental panel and take joint decisions to reduce resistance and ease the path of transition.
Step 3: Identify the Most Suitable Provider
There’s a lot at stake, and it’s crucial to select the most appropriate service provider. Find out everything you need to know about the prospective third parties. Make a shortlist, do due diligence and follow up on every reference given. Look for references from companies that have been working for an extended period with the potential provider. It’s not enough for a service provider to have a good reputation, organizations must carefully match their business requirements with the capabilities of the provider, so understand what they can offer and their expertise in the areas you’re looking for.
Step 4: Execute Detailed Agreements
After you have picked your service provider, create a strong agreement laying down its scope in clear terms, with KPIs, clauses and incentives so there’s no miscommunication and so the provider can be held accountable. Hiring outsourcing providers does not guarantee success — they must be clear about what your enterprise wants to achieve; they must have measurable targets; and they must get the help they need.
Treat the provider not as a vendor but as a strategic partner, an extension of your own organization. To overcome some of the key procurement outsourcing challenges and concerns — such as loss of control; security and confidentiality; integration of in-house and external teams, working styles and technologies, etc. — the organization must work closely alongside the service provider. It is important to have someone monitor and coordinate with the provider, smoothen the path, gauge performance and ensure compliance among internal stakeholders. It will be necessary to implement a change management process as it will reduce resistance and delays and improve user compliance.