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Over the past year, ICG Commerce has seen an unprecedented level of interest in procurement process outsourcing. Many industry thought-leaders have launched comprehensive studies on the topic, reporting that performance has exceeded early adopter's expectations and are projecting 15 to 50% growth over the next three years. Trade media and educational organizations that have historically avoided the topic are now approaching it proactively, including The Institute of Supply Management who recently included Procurement Outsourcing on their 89th annual meeting agenda. But perhaps the most direct evidence of a growing trend toward procurement outsourcing from ICG Commerce's vantage point is the 10X increase in the number of inquiries and RFPs we have received for outsourcing services.
While this increased interest in procurement outsourcing is clear and the value proposition can be compelling, many companies still seem to struggle to understand procurement outsourcing and determine the appropriate path forward for their own organization. Drawing upon recent discussions with dozens of companies that are exploring outsourcing services, my colleagues and I have compiled a list of common questions, behind the questions and have attempted to provide practical, real-world answers based upon our experience delivering procurement outsourcing services to over a dozen companies throughout the past four years.
1. What exactly IS procurement outsourcing and what is being outsourced?
This is perhaps the most basic question but it is a difficult one to answer. What one company views as procurement outsourcing, another may view as a consulting or technology service. In our view, genuine outsourcing differs from other procurement services based on the level and degree of on-going accountability placed upon the services provider. Procurement outsourcing typically involves long-term (36 - 60 months) day-to-day management of a group of procurement sub-processes (e.g., requisitioning, supplier management) for multiple category groups (e.g., Administrative Supplies and Equipment, ndustrial Supplies and Equipment, Telecom, IT Hardware, Travel, etc).
Services provided on a consultative or an outsourcing basis each deliver significant value. The more important question to ask is, "which is more appropriate for my organization?" To determine whether consulting services or outsourcing services are most appropriate, companies should ask themselves (A) is this an area that my company views as a strategic differentiator and are we willing to make the necessary internal investments to become and remain world-class? or (B) is it an area that, if managed and executed properly, can drive significant value to my organization but does not or will not receive the appropriate internal investment and focus? If you answered yes to (A) then either consultants or a supplemental procurement outsourcing relationship with appropriate knowledge transfer and an exit strategy can help you become world-class. If you answered yes to (B), then full spend management outsourcing can help you transform and become world-class without having to make additional investments in your internal infrastructure.
2. Does procurement outsourcing mean I have to lay-off half of my department and transfer activities off-shore?
No. Procurement outsourcing offers companies the ability focus on their core competencies and gain access to leading external capabilities in non-core activities, ultimately improving the overall level of procurement performance and results across all categories and activities without making large infrastructure investments. We see many companies looking to outsource what they either cannot manage well with their given resources and technology (thus reallocating to more core activities) or cannot manage at all.
We've also found that to be most effective in supporting the organization, a procurement function needs to be tightly connected to the organization as well as the supply market. Even in today's global economy, supply markets are still very regional for indirect materials requiring a local or regional procurement presence. Developing a strong end-user to provider relationship is a critical success factor for procurement outsourcing. The most successful outsourcing relationships provide users with easy access to individuals who work in the supplier's market on a daily basis, can speak the end-user and supplier languages, and are knowledgeable about the category, supplier and products or services being sourced.
3. Why do most companies consider outsourcing?
The reasons companies consider outsourcing and the reasons they ultimately decide to outsource are often very different. Many companies investigate outsourcing as a way to lower procurement related labor costs.
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