In procurement discussions around the globe, the term “procurement managed services” is increasingly replacing “procurement outsourcing.” The reason, rightly so, is a simple one. While “outsourcing” suggests simply having a third party do equivalent work to what had previously been done internally, “managed services” generally involve an augmented or additional capability to business processes and systems, linked to specific outcomes that go beyond just cost savings. As enterprises continue to focus on optimizing core processes and improving agility in the digital age, this trend will only increase.
Procurement managed services include spend analytics, strategic sourcing, category management, spot buying, transactional procurement and contract administration. The terms “source-to-pay” (S2P), “source-to-contract” (S2C) and “procure-to-pay” (P2P) are commonly applied to Procurement Managed Services. The primary business objectives of procurement managed services are usually cost savings, risk management and compliance, along with reduced cycle times and an improved end-user experience.
There are a number of reasons to look at hiring a managed service provider to perform some or much of a company's procurement functions, especially in areas of indirect spend. Better market intelligence, availability of pricing and best practices data from doing many transactions across companies, strong analytics and process control capabilities, expertise on procurement tool sets, and a global delivery model are just some of the reasons why managed procurement services can be the right choice for many companies.
Enterprises seeking to improve their procurement capabilities through a managed service provider can consider a range of solution options, including whether to select a multi-tower generalist or a specialized, “best-of-breed” provider that focuses primarily on sourcing and procurement. Typically, a large generalist can deliver services across a range of towers, including other business process services, such as Finance & Accounting and HR Services, and IT Services, such as Infrastructure and Applications Services.
A multi-tower service provider can have hundreds of thousands of employees, as well as a brand that is a household name. The specialist, on the other hand, is likely to have fewer than 10,000 employees and is well known primarily to domain experts. The evolution of technology and the increasing maturity of the services industry merits a reconsideration of traditional assumptions.
Traditionally, the value proposition associated with selecting a large global service provider for procurement included the following:
While all of these value propositions are theoretically possible, experience shows that most of them have a much smaller impact, if any, compared with expectations. Market experiences show that in fact:
Rate card economies of scale are often less than expected, and specialist providers are generally competitive, even when compared with large aggregated deals. Procurement engagements tend to be smaller scale from a headcount perspective — usually less than a few hundred, even at the high end — making staffing more manageable even for a specialized firm.
The primary benefit to the client from procurement managed services is savings on spend, rather than savings on the procurement function itself (i.e. labor arbitrage). Nonetheless, because procurement skills are better understood; therefore, quite possibly, more highly valued at the C-Suite of a specialist, a more focused firm can potentially attract and retain some of the best domain talent at a competitive labor rate.
Fact is, when selecting a procurement managed service provider, the answer is not “multi-tower” or “specialist” but rather who will be the right fit for your organization. Smaller firms may not be household names, but pound for pound, they can usually bring a high caliber of specialized talent. And, with shorter reporting structures, they can often achieve a very high degree of strategic alignment with their clients.
So, when selecting a provider, look beyond brand, size and scale, and take the time to fully understand the capabilities, the delivery model options, and, most importantly, the specific talent who will be working on your account, irrespective of whether your provider is a company of 400,000 or 4,000 or 400.
Bill Huber, Managing Director with Alsbridge, held high-profile positions in procurement leadership at several major U.S. companies prior to his ongoing success on the consulting and advisory side of the business. Bill is a recognized thought leader and sought-after speaker at major industry events.