Aberdeen Group Study: Procurement Outsourcing Moves Past Savings and Becomes More Strategic | Article
Now that human resources outsourcing (HRO) and finance and accounting outsourcing (FAO) have taken deep hold in corporations, procurement outsourcing (PO) is next up in the BPO batting order. Aberdeen Group was curious to see how enterprises have adopted PO today and what their plans are two years out.
“We wanted to find out the factors causing companies to outsource procurement as well as the reasons why they rejected outsourcing,” says Rick Saia, Research Analyst in the Global Supply Management practice for Aberdeen Group. In addition, his team wanted to determine best practices in technology, processes, and systems. “We got a pretty good picture of the yeses and nos of procurement outsourcing,” Saia says.
The result is May 2006’s The Procurement Outsourcing Benchmark Report: Moving Beyond Cost Reductions. The news is that procurement organizations are indeed moving beyond cost reductions and are becoming more strategic. “Companies today want to make sure they are getting the best product at the best price at the right time,” says Saia.
Differences in Thinking from 2004
Two years ago, when Aberdeen conducted the same study, it found there were four chief reasons to outsource procurement. They were:
- Obtaining better pricing through reduced transaction costs
- Reducing cycles
- Accessing supplier intelligence
- Cutting head count
This year, cost-cutting remains number one on the list. But reason number two changed: today companies outsource because they want their personnel to focus on more strategic activities like spend intelligence and procurement analysis.
Saia says the globalization of the economy is another key reason pushing companies to become more strategic. “The world is flatter,” he says, quoting the title of Thomas Friedman’s best-selling book. “Today, American companies are trying to source in more than just one country.” In addition, they are sending work to China and India to take advantage of the lower-cost labor.
Working outside your domestic boundaries adds a new layer of risk to the procurement process. Political stability becomes a question that requires careful analysis, points out Saia. “Companies know they can’t become dependent on supplies from one country if there’s a risk of political upheaval,” Saia says.
Today, companies also want data to study buying trends, the report found. They also want information to make sure suppliers are adhering to their contracts.
This year, tactical activities were high on the list of what to outsource. They include:
- Transaction management/procurement execution
- Invoice reconciliation and auditing
- Catalog content management
- Logistics management
- Travel booking
- Spot buy and operational sourcing support.
- Strategic sourcing negotiation
The study found 50 percent of the respondents chose not to outsource their procurement functions. For those in the yes column, 60 percent already outsource some of their procurement functions; the other 40 plan to in the next two years.
The report says “enterprises have waded rather than plunged into outsourcing.” Nearly 60 percent that outsource today are outsourcing no more than ten percent of their procurement functions.
But that is changing. Respondents said they plan to expand their outsourcing over the next year to about 21 percent of their procurement functions.
The study also found that best-in-class organizations were “more likely” to have a vice president or director leading the procurement organization than best-in-class organizations that didn’t outsource.
Why Companies Outsource
The study discovered companies want three chief benefits from outsourcing procurement activities:
- Access to improved pricing
- Lower transactional processing costs
- Access to spend category expertise
Why Companies Won’t Outsource
The study found five chief reasons companies reject PO today:
- A perceived loss of control (59 percent)
- The belief that procurement is a core competency (57 percent)
- An inability to build a business case for PO (43 percent)
- A prior investment in procurement application software (41 percent)
- An inability to measure savings and improvements (36 percent)
Saia says the rise of hosted applications gives buyers the visibility they need to see what’s happening. This visibility may erase the feeling of no control, since many offer a look that’s “as close to real time as possible,” Saia says.
Causes for Concern
The study found that the amount of spend under procurement organization management is critical to procurement’s transformation into a major contributor to enterprise value. Yet only 19 percent of the respondents that are planning to outsource have more than two-thirds of spend under their procurement group.
“That is a cause for concern,” says the report. “Aberdeen believes it is critical that any enterprise looking to outsource a procurement function or process places as much spend as possible under procurement management.”
The study also found that when companies have a large percentage of their spend under management, they are “able to make more informed decisions and reign in maverick spending.” Saia says companies “have more control when everything is on the books.”
How the study was done: The Aberdeen Group conducted an online survey in April and May 2006; about 170 executives responded. Staff members followed up the online results with phone calls to respondents.
Lessons from the Outsourcing Journal:
- Cost containment is still the No. 1 reason to outsource procurement functions. But having your staff focus on more strategic endeavors like analysis is a new No. 2.
- Companies outsource transactional activities first.
- Companies that have at least two-thirds of their spend under the management of a central procurement organization have a greater chance of outsourcing success.
- Half of the roughly 170 companies interviewed said they will not outsource. Loss of control, the belief that procurement is a core competency, and a prior investment in procurement software are all reasons causing companies to reject outsourcing.