The Procurement Outsourcing Imperative

Aberdeen's Tim Minahan addresses the "why" and "how" of sending procurement outside the four walls

Tempe, AZ  October 23, 2002  Technology advances are driving enterprises toward procurement outsourcing, and within five years companies that do not taking advantage of new opportunities to outsource underachieving areas of procurement will be at a competitive advantage, according to a new white paper from technology consultancy Aberdeen Group.

In his report, entitled "You Will Outsource Procurement: Here's Why and How," Tim Minahan, vice president and managing director for supply chain research at Aberdeen, argues that the inherent advantages enjoyed by procurement service providers (PSPs), along with advances in procurement and analytics technologies, are making greater outsourcing not only possible but necessary.

"PSPs offer the economies of scale, category expertise and infrastructure that many firms lack," Minahan writes, adding, "Recent advances in procurement and analytics technologies provide the visibility and control to enable enterprises to effectively manage these outsourced relationships."

With the economy recovering slowly from the recent downturn, companies must still emphasize cost control and improved performance. Since enterprises are spending half of every dollar earned to purchase goods and services, procurement remains a potent weapon for achieving those goals, particularly since procurement savings go directly to the bottom line, Aberdeen writes.

And yet the consultancy points to research showing that enterprises continue to lack the skills, expertise and infrastructure they need to manage their purchasing across all their spending categories.

The results: Enterprises have extended strategic sourcing initiatives to less than half their total spend, and sourcing remains decentralized for nearly 70 percent of companies. In addition, with few firms having put in place standardized purchasing and sourcing processes, maverick buying remains a huge problem, with nearly one-third of purchases being made off-contract. And, perhaps most key, few companies have clear visibility into their total spend, a key success factor in successful sourcing.

"Such factors strongly suggest that even the largest enterprises suffer from inadequate spend coverage and fragmented, under-leveraged and inefficient procurement operations," Minahan concludes. "In short, procurement is an underperforming asset at many companies. As a result, it is not hyperbole to estimate that enterprises are leaving billions of dollars on the table owing to suboptimal procurement processes and underleveraged spend. This is a luxury few companies can afford in today's tight economic environment."

To win back the dollars lost through inefficient procurement, many enterprises are moving toward outsourcing certain aspects of their purchasing to specialized service providers. In the past, travel services, benefits, payroll and various financial activities were the most commonly outsourced business process.

But now, Aberdeen writes, enterprises  seeking to further whittle down their operations to focus on their core competencies  are looking to outsource such supply chain processes as inventory management, logistics, manufacturing, product design and customer service  all of which were viewed in the past as core competencies themselves. In this light, Minahan asserts, "Procurement outsourcing is merely the next logical extension of the business process outsourcing (BPO) movement."

And then there is the technology side of the equation. "Recent advances in Internet-based procurement technologies (e.g., e-procurement, e-sourcing, reverse auctions, exchanges) and analytics provide the necessary visibility and control to effectively monitor and manage outsourced procurement processes," Minahan writes.

No doubt the likely benefits of procurement outsourcing will also be a factor in enterprises' decisions to move in this direction. Aberdeen cites cost reduction, improvements in processes and expertise, and increased focus on core competencies as the key gains.

For example, the consultancy's research has found that enterprises outsourcing the management of certain procurement processes and/or spend categories have seen material cost savings of between 10 percent and 25 percent, or even as much as 30 percent for specific categories.

In terms of process and domain expertise, Minahan writes, "PSPs can provide access to market-leading procurement technologies, as well as the methodologies for effectively deploying and utilizing these technologies." PSPs can also offer expertise in sourcing a broad variety of goods and services not currently covered by an enterprise's internal sourcing staff. "This is particularly true for indirect goods and services, which constitute between 30 percent and 60 percent of total enterprise spending, but have been poorly controlled by most enterprises," Minahan notes.

Given these drivers, Aberdeen sees a growing wave of procurement outsourcing sweeping over the corporate landscape. With 20 percent of large enterprises currently outsourcing some portion of their procurement already, the consultancy sees spending on outsourcing procurement services more than doubling from 2001 to 2005, rising from $4.8 billion to $9.7 billion in that period.

Tomorrow: The "How." iSource looks at the Aberdeen Group's recommendations for getting started with procurement outsourcing.