Has Procurement Outsourcing's Time Come?

Gartner says rate of outsourcing still low, but cost versus e-procurement driving interest

San Jose, CA  December 6, 2002  Relatively few companies are outsourcing their procurement function at present, but as enterprises find it increasingly difficult to train and staff their internal purchasing organizations, many are looking at procurement outsourcing as a viable alternative, according to new report from technology trend research firm Dataquest.

A recent survey by Dataquest, which is a unit of technology consultancy Gartner, showed that the percentage of enterprises outsourcing procurement is still very small. Only 6 percent of the respondents surveyed in June 2002 said they currently outsource a portion of their procurement function. However, a third of those respondents expect to increase their procurement outsourcing budgets during the next 24 months.

Rebecca Scholl, senior analyst for Gartner Dataquest's Information Technology Services program, said that one reason for the increased interest in procurement outsourcing is that it can serve to spread out the enormous implementation cost of e-procurement software over a longer time period. "Unlike procurement implementation, which demanded up-front investment and required backend support, procurement outsourcing can spread the implementation cost over time and offers true purchasing expertise," Scholl said.

The survey, detailed in a Dataquest report titled "After the E-Procurement Hangover: Is BPO the Right Painkiller?", showed that other drivers behind the procurement outsourcing movement include the requirements to focus on core business and to improve business processes, along with the need to gain process knowledge, innovate, shorten implementation times and improve service levels.

"These drivers show that procurement outsourcing is in an early phase of outsourcing in which the focus is still on business process re-engineering through innovation, rather than on the benefits of re-engineering," said Scholl. "In more mature forms of outsourcing, such as [human resources] and finance and accounting, the driver has shifted to benefits of re-engineering, such as reduction of overall costs. Reduction in costs does not yet factor in as one of the primary drivers of procurement outsourcing."

Clients expect a high level of procurement process expertise from their providers, and business process outsourcing (BPO) suppliers must either develop this process in-house or partner with pure-player providers that have process expertise, Gartner advises. The procurement function is a multi-enterprise process that requires specialized skills; therefore, procurement process expertise may be difficult to grow in-house.

"Providers must develop [innovative] pricing methodologies to showcase the value of outsourcing as a whole, relative to incremental unit cost savings," said David Hope-Ross, research director for Gartner. "Suppliers must find better ways to package [or] create value around their offerings. Those with aggregate pricing arrangements may require sweeping changes."