With CFOs focused on the bottom line, all areas of cost savings, including procurement activities, are under the magnifying glass. The good news is that providers are finding innovative ways of saving money beyond the usual group buying approach.

by Andy Teng

With cost reduction a greater priority than ever before, businesses are seeking new and inventive ways to achieve this goal. As a result, the CFO continues to expand his role, overseeing functions that once resided largely outside the finance department. A clear example is the CFO’s growing involvement in indirect procurement activities, a function that until now has been handled largely by procurement specialists.

But with CFOs watching every penny, slashing indirect procurement costs can have a significant impact on the bottom line. It’s a fact that hasn’t gone unnoticed by F&A leaders, as demand for outsourced procurement services is projected to grow rapidly during the next three years, according to findings recently reported by NelsonHall analyst Rachael Stormonth. In a webinar the firm recently hosted, Stormonth predicted that procurement outsourcing—a market estimated at $420 million this year—will grow to $900 million by 2009, a sizzling compound annual growth rate of 28 percent.

“Procurement BPO is the fastest growing back-office area of BPO and will be a $1 billion market by 2010. There have been some interesting new contract awards in the first half of 2006 with more deals in the pipeline,” Stormonth said. “NelsonHall research indicates that the deals will accelerate in 2008. Our recent survey confirms our predictions that growth over the next few years will come from North America and Europe over the next few years.”

DEFINING INDIRECT PROCUREMENT BPO?  
While the overall indirect procurement market is much larger than NelsonHall’s estimates, the research group narrows its definition to exclude major segments such as IT outsourcing, which is an already established market. Instead, its definition of indirect procurement BPO is:

“An external service provider having responsibility for managing some or all of a client’s procurement activities for an agreed set of indirect spend categories. The contract requires the vendor to manage categories, processes, and procurement infrastructure.”

The firm also makes clear distinctions in procurement BPO from plain procurement outsourcing. It requires BPO contracts to cover more than one type of indirect spend category; it discounts e-procurement and hosted applications; no standalone sourcing services; procurement embedded within other forms on outsourcing in a single category don’t qualify, including print procurement; defense sector- managed procurement as well as consortia buying are not included; and integrated supply chain service for maintenance and repair outsourcing by industrial distributors also don’t count.

“In order to qualify under this definition, BPO contracts must involve BPO vendors taking an over all responsibility for the business process and not just applying IT or applications that facilitate the process,” she added.

What indirect procurement BPO does encompass include strategic sourcing (including spend analysis, sourcing strategy, supplier identification and selection, contract negotiations, category management); supplier management (contract and supplier management); requisition and order management (requisitions, PO issuance, inventory management, spot purchases); settlement payment and fulfillment (receiving/distribution, invoice reconciliation, payment validation/authorization, accounts payable).

Although indirect procurement BPO covers a wide range of activities, few existing contracts cover all of these areas, she said. However, as the market continues to grow and mature, more contracts with a broader scope covering myriad services are expected.

DRIVERS OF PROCUREMENT BPO
Many of the drivers propelling the broader BPO markets are also behind the procurement outsourcing phenomenon. For instance, cost reduction, process improvements, greater control, access to best practices, and freeing up internal resources are often cited by buyers of FAO and HRO as the reason for outsourcing. Beyond these foundational drivers, procurement BPO buyers also are seeking to have greater monitoring of vendors, employ the service provider as a change agent, and integrate their purchasing activities with other outsourced services.

Stormonth noted that often companies are seeking procurement outsourcing as a way to garner faster delivery of goods, improve access to specialized services, and transfer risk to the outsourcers. Additionally, reduction of capital expenditure on procurement systems—a reason often cited by other FAO and HRO buyers—is a motivator for indirect procurement BPO.

Beyond the customers’ wish list, procurement services also have expanded with provider capabilities. Stormonth said initially, many focused on bulk purchasing to leverage economies of scale, but increasingly they are looking to other ways to bring value to clients, including:

• Savings on costs of goods and service procured;

• Transformation of the procurement function across the organization;

• Process improvement, improved compliance, spend visibility and management;

• Freeing up internal resources to focus on strategic functions;

• Transformation of the back-office;

• Process standards and platform consolidation.

These and other value-added propositions have helped to draw more buyers into the procurement BPO market. In fact, according to a NelsonHall survey, 15 percent of organizations said they plan to extend outsourcing of indirect procurement by 2008.

While a variety of benefits help make outsourcing a compelling sell, in the end, hard-dollar savings are why companies of all look to BPO.

“We’re also seeing financial healthy organization expressing a desire to stay ahead of the competition in terms of their margins.”

Although procurement BPO is being adopted across all industries, a few appear especially eager to jump on the outsourcing bandwagon, according to Stormonth. These sectors include consumer product goods, industrial manufacturing and automotive, high tech and communications, financial services, and utilities. Limited niche outsourcing is also taking place in the construction field as well.

She explained that many companies outsourcing in these sectors share common challenges: a need to reduce costs while centralizing its activities. “Very often the decision to outsource aspects of procurement is part of a corporate program aimed at improving bottom-line performance,” she said.

This interest is being raised in the C-level suite, NelsonHall found. For instance, the CFO is exploring outsourcing for cost savings and control reasons, while the COO sees the benefits of process improvement.

She added that buyers often have multiple facilities within a region that operate independently. Some of these organizations are mid-market sized and lack procurement capabilities. A number of industries also already outsource some or numerous F&A and/or HR functions.

AREAS OUTSOURCED
Three categories currently are outsourced, including:

• Traditional, simple indirect spending such as desktop IT, office supplies, and equipment;

• Complex areas such as legal and professional services; and

• Categories requiring greater central control such as travel and marketing-related spends.

While there appears to be tremendous room for indirect procurement BPO growth, Stormonth also noted numerous barriers in the way. For instance, many buyers remain skeptical that providers can offer reduced costs with improved services. Others worry that outsourcing of procurement—as in any outsourcing program—leads to a loss of control and internal expertise.

Another perpetual concern is the “lack of internal buy-in from key stakeholders. This is a critical success factor,” she added. “This means not only senior executives but also buy-in at the local level.”

Because the procurement BPO market is still in its infancy, Stormonth said she believes vendors still face a credibility issue as well. However, as they demonstrate their abilities and achieve more success stories, the market should continue to brew along at a double-digit rate.