Despite interest in cutting costs and adopting best practices, traditional barriers to outsourcing keep buyers on sidelines.

by Rachael Stormonth

If we look at procurement BPO contract awards to date, some clear patterns reveal the types of organizations that have chosen to outsource aspects of their procurement function. Many early adopters are large, decentralized organizations with unconsolidated indirect procurement operations working on multiple platforms. These have typically outsourced other back-office areas and have prior experience of a service provider procuring IT within an infrastructure management contract. At the other end of the scale, some smaller firms that lack internal resources to manage the procurement of their indirect spend have also chosen the BPO route.

There are also some patterns of early adoption in terms of industry vertical. High-tech/electronics, communications, and aerospace sector organizations were early adopters of procurement BPO. BAE Systems, a pioneer in 2001, is one, along with Lucent, Avaya, and Harris.

There has also been activity in various industrial manufacturing segments (for example, Goodyear Tires). In the utilities sector, some indirect sourcing and procurement transaction processing activity was included within mega-deal transformational BPO contracts in North America (NiSource, TXU, and BC Hydro).

A niche segment in which some small-scale activity is occurring includes construction. In the past year, major contract awards in the CPG and retail sectors were announced by Unilever, Colgate-Palmolive, and Coty.

The financial services sector has not taken up procurement BPO as quickly as predicted after Deutsche Bank’s contract award in 2004. A contract was recently signed by Erste Bank in Austria, and additional awards are expected. Within the next year, contract signings are also likely in the professional services and logistics sectors.

The key procurement outsourcing driver is a belief in the service provider’s ability to realize major savings in the costs of goods and services from strategic sourcing and to achieve subsequent process efficiencies. In theory, it is possible for a vendor to reduce the cost-of-goods acquisition quite easily from aggregated buying. But realizing actual savings is far more complex than agreeing on volume discounts from selected suppliers. The CFO will be looking for much better management information to enable improved cost control, and he is more interested in the strategic impact of procurement BPO on the bottom line.

However, procurement BPO fits into the general pattern within BPO: cost savings is not the only driver. The client will expect the outsourcer to make significant improvements in the quality, consistency, efficiency, and management of the procurement function across all the business units within contract scope.

Managing large numbers of suppliers and having to deal with corporate cost reduction initiatives are major issues for many organizations. Some, challenged by poor consistency of their indirect procurement processes supported by different systems, are looking at outsourcing as a pathway to consolidation.

Other drivers include gaining access to specialist skills: few organizations can have deep market knowledge and category management expertise in all non-core areas of spend. There is also the perception that an external service provider can drive change, not just through technology and process improvement but also by being a neutral, independent party whose compliance input is valued. Other factors that can contribute to an organization seriously considering outsourcing include a:

• Greater awareness of BPO as an offering for indirect procurement;

• Desire for an outsourcer to bring improvements such as faster delivery of goods or improved access to specialist services;

• Desire to transfer risk to the outsourcer, including supplier risk mitigation; and

• Decision to outsource as an alternative to having to invest in new systems.

Procurement BPO is in its nascent stage. Few examples of major procurement outsourcing activity in the marketplace exist. Some organizations see no major issues with internal procurement performance, or they do not believe that services providers are offering a value for money service. Organizations are not yet aware of different vendors’ capabilities, and there are few major vendors currently in the marketplace to choose from.

Pricing models also lack standardization. The inclusion of gain-sharing or “bonus” elements can lead to suspicion of vendor greed. This is exacerbated when baseline data is poor and creates major challenges in clearly defining potential and realized savings.

A common concern relates to losing internal procurement expertise. Internal procurement staff can be redeployed rather than replaced. It is not yet fully appreciated that the client drives the scope of the outsourcing contract and can retain whatever activities and responsibilities it chooses.

Management buy-in is a critical success factor: this is particularly difficult in decentralized operations, and the CPO is often more cautious than the CFO.

Some believe that process complexity around sourcing indirect goods and services makes outsourcing inappropriate. Other concerns include a lack of confidence in a vendor’s ability to achieve changes in organizational buying behavior to improve compliance.

Some organizations have been disappointed by a previous e-procurement initiative where savings have not been realized, perhaps because of low levels of spend going through the system. Other reasons cited include the inability to build a credible business case or measure the benefits.

Overall, as organizations become more aware of the strategic importance of the procurement function, they are more likely to consider the various benefits of outsourcing this back-office area.