Mismatches between buy-side requirements and vendors’ services and capabilities prove challenging.

by Rachael Stormonth

The primary inhibitor of growth in the overall BPO market is a lack of supply-side capability, and this situation appears to be especially true in procurement outsourcing, with a significant mismatch between buy-side requirements and the services and capabilities that vendors wish to deploy.

This has particularly manifested itself in levels of procurement BPO contract activity this year. Looking back over 2007, it has been a quiet year overall. After the contracts awarded by Kimberly-Clark to ICG Commerce in January, and by First Horizon National to Accenture in March, it looked as if a pick-up in new signings was commencing. But where are the further procurement BPO contracts that we expected by now?

ICG Commerce appears to have been more successful than most and refers to having won seven contracts in the last seven months. However, four of the larger contracts signed were contract renewals.

IBM, Ariba, and Accenture have all been quiet: Ariba appears to have deemphasized its BPO offering and focused purely on its hosted offerings, and Accenture seems to have adopted a preference for combining procurement BPO with its other back-office BPO services rather than strongly focusing on procurement BPO as a growth driver in its own right. The pipeline as we move into 2008 is quiet, although some other vendors are still considering moving into procurement. However, the question remains as to whether these vendors are approaching the market in the right way or just see procurement BPO as a means of defending their F&A outsourcing proposition rather than as a key offering within their service portfolio.

Which brings us to the question, “Have vendors been approaching the market in a way that is supporting its take-off?”

There remain at present a number of discrepancies between vendor and buy-side attitudes, some instances of which are highlighted below.

Vendor Thinking
1. I see major opportunities (for me) in gain-sharing.

2. It’s just an add-on to finance and accounting BPO: I just need to analyze the invoices going through the system to be able to identify what is being spent on whom and to be able to manage supplier contracts. I have a great suite of tools that address indirect procurement pain points such as poor spend visibility, process variability, and contract leakage. My spend assessment and solution identification service quickly identifies procure-to-pay quick hits. Then we can structure and deliver a strategic roadmap integrating the procure-to-pay platform, BPO services, and advanced analytics, as well as risk assessment and transaction support.

3. I have great experience in sourcing and procurement already: in IT and telecoms. That’s sufficient, isn’t it?

4. I can consolidate my clients’ buying to achieve major cost reductions from suppliers.

Buy-Side Thinking
1. Gain-share? No way! I am willing to pay for services rendered on a per-transaction basis. Spend analytics might be fine, but I do not have sufficient visibility into my historic spend to identify with any accuracy the savings that may be achieved by the service provider.

2. I am being offered potential savings that do not seem likely. Will this require substantiation? Also, the cost of operations would potentially be higher from outsourcing.

3. This isn’t about P2P. I’ve already got the accounting under control. I need category management capability to minimize my spend on areas that have been neglected in-house in the past. Is there a vendor that can manage thousands of very low-value spend items globally?

4. My indirect spend is fragmented and decentralized, reporting is poor, and there is no sharing of best practice across the organization. Can a vendor manage this situation?

5. How many service providers out there have the capabilities to serve my industry, my size of organization, and the geography or geographies in which I operate?

6. I want to try this with certain categories to prove the concept. Is there a vendor that can manage specific areas of spend requiring a level of category knowledge that I do not have in-house? I need a partner that has strong category management expertise in the areas where I lack capability, and can cover the geographies where I lack scale and haven’t centralized procurement.

7. I am not willing to have my indirect spend data shared with potential competitors: it’s too sensitive. Also, I only want support for piecemeal categories and geographies. In addition, my pattern of requirement is unique.

Catch 22 aspects
This leads to a number of “catch 22” situations in the current market:

1. Scope of Procurement BPO contract
Buyer: I may be willing to outsource a few areas of spend at first to test the vendor.
Vendor: I need to be able to manage a sufficient level of spend in order for it to be viable.

2. Category management capability and supplier networks
Buyer: If the vendor does have its own extensive supplier network, I may not want to be tied into this. But, if the vendor does not have its own extensive supplier network, can it claim to have the capabilities to manage my indirect procurement?

3. Appropriate skill sets: The major SI vendors have strong P2P capability but lack credibility in the category management skills I require. The category management specialists are typically small companies. They have category management skills but lack the range of geographic coverage I require and may lack the scale and perhaps brand name to be acceptable to my senior management.

The Future
So what is the picture for procurement BPO in 2008? Broadly, procurement BPO will continue to be an add-on to F&A outsourcing for the major players with no strong emphasis on category management.

However, this will begin to change with some of the following possibilities:
• Can Indian companies do category management offshore as a sort of KPO business?
• Will the venture capitalists back any of the category management specialists?
• Will a more standard pricing model for services emerge?
• Will a new breed of capability develop from emerging economies?
• Will competition become more evident from industrial distributors providing integrated supply chain services expanding the scope of their activities and also the range of their spend categories from MRO into services areas?

Rachael Stormonth is vice president at NelsonHall. She can be reached at rachael.stormonth@nelson-hall.com