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The E-volution of BPO Procurement Outsourcing

Until now, selling your wares on the Internet has been the big focus of e-commerce. But at this stage of on-line commerce, buying is growing rapidly in importance as well, according to Dr. Bernadette Margel, a partner and global leader of ‘PricewaterhouseCoopers‘ Procurement Outsourcing practice. And it is all happening very fast–at “Web speed,” she says.

The Web offers an unparalleled potential for business procurement buyers. There’s an unprecedented array of offerings, and the speed and efficiency inherent in the process helps companies compete in the brave new world being shaped by the Net. The Web helps streamline procurement if a company wants to do its buying completely in-house, and it also provides the opportunity for a third party service provider to handle some or all of a company’s procurement in the online environment.

Margel sees Web-enabled procurement as a four-tiered model, where the first tier involves minimal but effective use of the Web, progressing by stages to the fourth tier, where procurement becomes a full-blown business process, outsourced to a service provider and offering major strategic process improvement and cost benefits.

At the first tier, business-to-business (B2B) e-commerce allows a company to outsource part of its shopping needs. Procurement outsourcers are creating portals that offer a one-stop shopping experience at their online marketplaces. The portal owner arranges with various suppliers to place their products, catalog style, on the portal’s Web site. Members can then peruse the on-line catalogs at their leisure and can purchase desired items directly from these suppliers.

Today’s technology, however, allows only a limited number goods and services to be appropriate for a portal catalog. For instance, the name of a commodity has to be easily understood by a search engine because that’s how members find what they are looking for.

E-xchanges Offer Old Style Discounts

Nonetheless, portal e-marketplace operations already have greatly increased B2B transactions, Margel observes. Gradually, however, she believes a second tier of e-business, called “e-xchanges” will replace them, because e-xchanges perform more strategic sourcing functions for their customers. (Strategic sourcing is the process of not just offering goods on the Internet, but of managing the selection of suppliers.)

The e-xchange offers an additional economic advantage because shopping there yields discounts bigger than its members would qualify for individually. An e-xchange owner selects specific commodity suppliers who are willing to offer superior contract pricing, terms and services, and then aggregates its members’ dollar volumes to negotiate a discount for all.

Margel uses stationery as example of a commodity found in an on-line office supply outsourcing e-xchange. She labels this a horizontal exchange because it attracts a large number of members from a variety of different industries simply because anyone doing business needs stationery materials. Horizontal exchanges specialize in selling such universal products as office supplies, office furniture or facilities management materials.

A variation of the horizontal exchange is the third tier of Margel’s model — a vertical e-xchange, such as one General Motors announced in February (and which was repositioned in early March as a cooperative venture between Ford, General Motors, and Daimler Chrysler). There, a major player decides to transform its procurement department into a revenue generator.

The foundation company approaches its competitors and customers — businesses with the same purchasing needs — and offers to combine their needs with its own to create additional buying leverage. The goal is to lower the price by aggregating the purchasing volume. E-xchanges permit buyers to increase their reliance on Web-based procurement even further, says Margel. “Companies that are trying to focus especially on spend reduction are going to take full advantage of these e-xchanges.” As for suppliers,

Margel says they will broaden their use of mass customization techniques to create more and better ways to present their offerings in effective e-formats. “Everyone benefits,” says Margel. Suppliers gain access to new customers and profit from efficiencies in the new selling process. Buyers gain improved price discounts and services through multi-client purchase-volume leverage. The financial value of the benefit will differ for each participant, but, in general, small-to-mid-sized companies will tend to see greater rewards than large-scale operations from these e-xchange operations.

Procurement Outsourcing

E-purchasing, however, represents only 50 percent of any company’s procurement needs. That’s because e-purchasing requires a degree of standardization that can’t encompass all of a company’s purchasing requirements. E-commerce in its present incarnation is not capable of dealing with the kinds of buying needs that are unique to each company. And the e-marketplace also can’t handle the tail end of the transactions — receiving and accounts payable.

Procurement BPO — the fourth tier in Margel’s picture of things — fully includes this critical, remaining 50 percent of the “req to check” cycle. And, as in any outsourcing agreement, the BPO provider is responsible for 100 percent of the process.

BPO procurement is a continual, two-way exchange of information between vendor and client, unlike portals or e-xchanges. Only a BPO provider will analyze the buyer’s spend habits and ask “why?” Or devise a better procurement system for those commodities. Or customize a procurement application by making use of current best practices, integrating it with a company’s finance and accounting system, and even coordinating its bank transfers and internal audit.

By viewing procurement as full Business Process Outsourcing and as an end-to-end process, Margel says, a corporation can leapfrog its internal barriers to reengineer its procurement processes — and generate more efficiencies and cost savings — at the same time that it takes full advantage of the spend reductions and speed of leveraged e-buying.

Most important, outsourcing the entire process can give a company the tools to take a lead in the marketplace. “The strategic use of BPO can enable a company to focus on areas of greatest sustainable competitive advantage,” says Margel.

Lessons from the Outsourcing Primer:

  • Business-to-business outsourcing is focusing on buying as well as selling on the Web.
  • E-purchasing will continue to grow rapidly in importance, because it is fully half of the e-B2B equation. The breadth-of-view provided by the Internet is here to stay and will only improve.
  • Portal e-marketplace sites, which enable buyers to gain access to suppliers’ catalogues more easily, have greatly increased B2B buy-and-sell transactions. They are likely to be displaced, however, by managed e-xchanges where the owner actively performs a strategic sourcing function on behalf of purchasing customers.
  • BPO outsourcing transfers the ownership of the entire procurement process to a professional who can focus on procurement processes and re-engineer them to develop a competitive advantage.

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