The Current Economy Encourages A Close Look At Procurement Outsourcing
Business process outsourcing (BPO) is now not only accepted but expected in today's marketplace. Procurement outsourcing is quickly moving into the spotlight, along with human resources (HR) and finance and accounting (F&A). "Although HR and F&A are a bit more mature in the market, more and more firms are seriously investigating the options around procurement outsourcing," says Tracey Hinkle, a portfolio manager for EDS' Procurement BPO Services, a division of the Plano, Texas-based global IT and BPO services provider. "Today, we are consulting with numerous global 1000 companies on ways to add value through Procurement Outsourcing Services - this volume of activity didn't exist two years ago," reports the executive.
One of the more recent drivers shifting procurement BPO into the spotlight is procurement's unique ability to generate value as well as reduce costs - something companies desperately need in the current economic environment. "Procurement outsourcing, like its BPO brothers (HR and F&A), provides reductions in operational costs, but procurement's ability to impact third-party expenditures, in addition to operational expenses, delivers immediate results to the bottom line," Hinkle explains. "A dollar saved is a dollar earned, and companies can use these dollars in several ways: They can earmark the immediate savings to self-fund the procurement initiative or use the new cash stream to fund other strategic initiatives. This value creation factor makes procurement outsourcing a compelling story," notes Hinkle.
What Procurement Outsourcing Is and Isn't
What exactly is procurement outsourcing?
First, the definition of procurement, according to IDC, a market research firm based in Framingham, Massachusetts, refers to the process of managing activities associated with a company's need to procure the goods and services required to either manufacture a product (direct) or to operate the organization (indirect).
Second, procurement outsourcing (procurement BPO) involves the outsourcing of parts or all of a company's procurement functions (people, processes, systems, and expenditures) to an external service provider. Today, the procurement BPO focus is on indirect (non-core) procurement.
Procurement outsourcing typically includes many of the traditional IT outsourcing elements - systems integration, transition, change management, service level agreements (SLAs), and governance. "But, more importantly, procurement BPO is about reengineering business processes - it's about changing behavior. "It is not eProcurement," the EDS executive points out. "The focus of BPO is on the procurement process - which is supported by enabling technologies, not the other way around. Historically, many firms have invested in eProcurement solutions without changing their processes, which has resulted in significant capital investment with limited results."
Is Procurement Outsourcing Right for You?
Procurement outsourcing is a strategic decision and one that requires serious consideration. When evaluating your options, there are some key points to ponder:
- Are you under pressure to reduce costs and improve shareholder value?
- Is your industry facing increased competitive forces? Global competition?
- Are your competitors selecting a BPO strategy?
- Have recent strategic activities (mergers, acquisitions, new products) placed significant pressures on your procurement operations?
- Do you need a change agent to transform your procurement operations and systems? Or, are your procurement assets best-in-class, ready to be commercialized?
- Even after best efforts, does your firm still struggle with "maverick buying" and inefficient processes?
- Does your corporate culture lend itself to an outsourcing environment?
- Do you have a successful track record in managing outsourcing relationships?
- Would you be able to obtain an executive champion and CXO buy-in?
If you can answer yes to most of these questions, then perhaps your procurement operation is a diamond in the rough waiting for the opportunity to dazzle. Part II of this series will outline practical steps to polish your diamond through an outsourcing strategy.
Lessons from the Outsourcing Journal:
- While procurement outsourcing is not as mature as other BPO processes like HR or F&A, more companies are "kicking the tires." This new popularity is due to the fact that procurement outsourcing is both a source of value and a source of cost reduction.
- Most companies have procurement systems that are outdated and/or not integrated - creating inefficiencies in process and inaccuracies in spend data, along with the need for continual investment.
- Procurement outsourcing gives the buyer immediate access to world-class systems and processes and mitigates the need for ongoing capital investments. An outsourcing partnership can serve as the catalyst for company change that drives incremental benefits that a firm cannot achieve on its own.