Nearly half the firms in Europe and the US are considering outsourcing part of their procurement operations by the end of 2006, according to a just released survey by Accenture. This figure more than doubles the 22 percent of respondents who currently outsource aspects of procurement.
Results of the survey, which entailed querying more than 200 procurement directors from a wide variety of industries across Europe and the US, found the most acceptance in France. The Accenture study discovered more than half of French companies surveyed are most likely to outsource procurement in the near future, with 64% of those respondents saying they would by 2006.
Firms in the UK and US were the next most likely to outsource these functions by 2006 (58% each), followed by companies in Italy (42%). Thirty-nine percent of surveyed companies from Germany, Austria, and Switzerland said they anticipate outsourcing procurement processes in the next three years.
“Given the market demand going into the study, we thought the numbers would be strong; but not this strong,” says Accenture’s President of Procurement Solutions Donavon Favre. He points out procurement is generally not a core competency. “Because of this, firms see procurement outsourcing offers a value they haven’t been able to attain on their own,” he explains.
Size Does Matter in Procurement Outsourcing
Company size in terms of sales revenues is the clearest indicator of both present and anticipated use of procurement service providers (PSP). Thirty-one percent of the largest companies surveyed said they presently outsource some aspect of procurement, while another 36 percent said they plan to do so in the future. Conversely, only 15 percent of smaller companies said they outsource procurement functions today, while another 34 percent said they intend to do so in the future.
Primary Drivers: Cost Reduction, Time for More Strategic Activities
Non-strategic processes such as application hosting and requisitioning-to-pay and indirect spend categories are the areas most often outsourced. Relative to these activities, 43% of respondents said the combined opportunities for cost reduction and the ability to focus more time on the management of the categories they retained in-house were the primary drivers.
An additional 22% of respondents said that even though they were not committed to such plans, they were considering outsourcing part of their direct materials to procurement service providers (PSP’s) by 2006, compared to nine percent that do so today.
This number, coupled with 50% of companies that will embrace procurement outsourcing, is the greatest evidence of an elemental shift in corporate perception of non-core outsourcing, according to Accenture’s Favre.
Favre goes on to say, “Everyone agrees there’s a large amount of value in procurement outsourcing. Firms have tried it internally and not gotten there; others have tried to build procurement networks with the assistance of consulting firms; and some have looked just for a technology answer in trying to build their own internal procurement networks. They haven’t been successful. So what’s left? Outsourcing.”
Increasingly, businesses are outsourcing part or all of their procurement to one or more of a growing number of specialist third-party PSPs. But to date, there has been no uniformity to the trend.
Procurement Outsourcing Is Well Established and Growing
“Procurement outsourcing is here to stay,” says Favre. “The procurement machine from an external provider has to cost less than the one buyers would run internally. But there’s a second piece to the equation. The capabilities have to be stronger, built around technology and the value-added services that come from using the right providers.”
There are so many categories that surround procurement outsourcing. Some global firms can have difficulty in having so many different procurement experts in-house, which makes procurement outsourcing so appealing, according to Favre. For example, a bank has a difficult time having 58 procurement commodity experts on-staff. But a PSP can offer such diverse services on a much greater economy of scale.
“Most of the arguments against outsourcing back office functions have pretty much been eliminated,” says Favre. “It just doesn’t make sense for most companies not to consider outsourcing as many of these functions as they can due to the twin factors of proven cost reduction and added value.”
How Accenture Conducted the Study
Accenture approached a selected number of senior procurement executives drawn from a wide range of countries, industries, and sizes, asking their views on the extent and direction of this outsourcing trend within their own businesses.
From April through July of 2003, 219 procurement directors from companies in 14 European countries and the United States completed a Web-based survey on their current and anticipated procurement operations. Eighty-three percent of respondents work in organizations with sales revenues exceeding $500 million, and 67% of organizations had operations in five or more different locations. Over three-quarters (79 percent) of those surveyed were the most senior procurement executives in their firms responsible for procurement at a corporate level. Respondents represented the manufacturing, telecommunications, retail, services and public sectors.
Lessons from the Outsourcing Journal:
- An Accenture study found the companies in France were the most likely to outsource procurement functions by 2006 (64%). Companies in the United Kingdom and the United States were the next most likely to outsource procurement functions (58% each), followed by companies in Italy (42 percent).
- Company size is the clearest indicator of both present and anticipated use of procurement service providers. The higher the revenue, the greater the likelihood that procurement outsourcing is in the immediate future.
- Non-strategic processes such as application hosting, requisitioning-to-pay, and indirect spend categories are the areas companies outsource most often.