Will the procurement outsourcing market begin to pick up speed in 2009? All the signs say yes.

by Rachael Stormonth

After several years of somewhat stunted growth, a convergence of many different phenomena is gathering that should drive an increase in the use of procurement business process outsourcing that has been a long time coming. These catalysts include the economic downturn, a shortage of talent, a widening field of service providers that are developing capabilities onshore and off, and the development of a more attractive hosted delivery model for the underlying technology.

On the outsourcing side, the number of major indirect procurement BPO contract signings in the public domain in the last year has been lower than anticipated. However, there has continued to be activity where large and mid-sized organizations have outsourced selected areas of indirect spend to lesser known service providers, also where organizations have looked for offshore support in activities such as vendor data management.

In the U.K. telecoms service provider O2 signed a contract in September with 4C in which it outsourced the management of £350 million of its indirect spend (the fact that client and service provider both have a company name comprising a number and a letter was presumably not a deciding factor!) Categories in scope encompass non-core IT, some areas of HR spend, property, facilities management and professional services.

In this contract the decision to outsource is part of a wider reorganization of the company’s procurement operation. A few months earlier parent company Telefónica had given O2 UK's procurement operation a wider responsibility to influence, if not directly manage, the whole group’s spend portfolio of £3.5Bn. As a consequence, O2 UK's procurement function is expanding by over a third to over 50 personnel in order to cope with the increased requirements in the direct areas. The procurement department is also restructuring to be organized along category lines. Having gained recognition at group level for its achievements in direct spend management, O2 UK is now looking to an external services provider to improve performance in key indirect areas. The new departmental structure is a much better fit for this use of outsourcing. The major requirement in the short term is to increase internal compliance. Driving compliance through using an outsourced provider can present challenges, in particular if the compliance culture at the client organization is weak: In this case 4C is running a help desk for O2 as part of its efforts to increase the level of compliant spend.

In-House Activity
Recent initiatives that procurement departments have executed include:
• Minor IT initiatives, such implementation of a supplier identification tool;
• Major IT system changes;
• Centralizing the procurement of selected indirect spend categories;
• Activities to save procurement personnel costs;
• Near- or off-shoring of some transaction processing activities;
• Ethical procurement initiatives; and
• Improving links with key suppliers.

There are some clear patterns in how successful these different types of initiative have been. On the whole, minor IT initiatives have been successful: In one example, an organization rolled out a catalog of low-value goods on its intranet, with the service delivered by a third party, and is delighted with the results coming from both process efficiencies through employee self service and systemized authorizations, and also from reduced maverick buying.

Major IT system changes, however, have had very mixed results, some falling seriously behind schedule and failing to provide the level of integration required. This is no surprise, as this kind of initiative is always going to be higher risk.

Interestingly, in-house initiatives to centralize procurement across some spend areas have also had mixed results. One European high-tech organization tried to centralize its technical services procurement but within a few months had to redistribute the activity again as it did not have the knowledge to support the process. One type of initiative that did not work for any of the organizations NelsonHall has spoken to was taking out headcount from the central procurement function, perhaps reducing the number of higher salaried procurement staff. There is a very strong sense by CPOs that this kind of cost-cutting negatively impacts the procurement function’s ability to bring value to the business.

Ethical procurement initiatives are getting very strong votes of approval. One U.S. pharmaceutical firm says it has seen ecologically sound procurement benefiting the entire business and driving a positive brand image. The business benefits of ethical procurement can extend across the entire organization.

Outlook for 2009
The good news for service providers is that, as we approach the end of 2008, active interest by organizations in outsourcing procurement is increasing. Some organizations are revisiting their consideration of outsourcing areas of procurement after previous investigations that went nowhere, perhaps because they had limited the scope to low-risk, low value areas of spend, leaving little opportunity for services providers to demonstrate potential value from their services, and no real business case for providing a service.As you will be well aware, organizations in virtually every sector are experiencing
more pressured economic conditions. Where historically there has been a reluctance within some large organizations’ procurement functions to seek external advice, procurement departments are now likely to be more ready to investigate ways of driving cost savings and process efficiencies.

Given the current uncertain environment, organizations are not in a position in the short term to consider new “transformational” outsourcing initiatives: Those that involve asset transfer or the implementation of a new procurement platform. However, some organizations will look for an external service provider to deal with specific needs that are unable to manage in-house.

Issues currently being faced by many procurement departments in managing their indirect spend include:
• Talent management. There is a procurement skills shortage, exacerbated in developed regions by the demographic shift, with over 25 percent of the working population in many countries approaching retirement age in the next few years. For procurement skills specifically, a range of activities such as e-sourcing events and supplier development has developed, enabled by new tools and technologies. Furthermore, just as has been happening with HR, there is an increasing desire to focus on more strategic activities, coming from procurement departments, or their organization
(or both).
• Managing a large number of suppliers, with lack of ability to identify examples of duplication.
• Global sourcing.
• Inadequate contract management, so potential discounts not being realized.
• Lack of in-house resources to have good market intelligence for all areas of indirect spend.
• Managing decentralized buying. While more mature procurement organizations in large enterprises have established global competency centers for major areas of direct spend, indirect spend typically remains decentralized.
• Broken processes for requisitioning in some areas of spend, such as niche professional services.
• Educating employees on new procurement procedures.
• A need to increase the level of spend under management, especially in high-value categories that carry a high degree of “emotion” for the requisitioner (e.g., marketing) or the end user (e.g., travel and hotels).
• Managing quality issues where there is no feedback loop.
• High numbers of manual invoices.
• Need to reduce costs in transactional activities such as accounts payable processing.
• Being too busy on tactical activities to be able to spend sufficient time on activities that are more strategic in nature, such as sourcing strategy and analysis, or supplier development.
• Need to position procurement as bringing value to the business (the same kind of journey the HR function has been making in recent years).
An external service provider should be able to bring:
• Access to skilled resources, in particular deep market intelligence capabilities for indirect spend categories
• Tools that can help deal with some of the issues listed above; e.g., spend analytics to improve visibility and reporting, also contract management software and supplier identification tools
• Ability to support process reengineering (and not just through technology) to bring greater efficiencies; reduce non-contract buying (e.g., requiring additional approvals for POs identified as “discretionary”); or bring savings, such as negotiating longer periods for early payment terms.  
• Services that help drive internal compliance.
• Lower-cost processing capabilities if transaction processing is required, through automation, standardization, offshoring, etc.
• Support to the procurement function in influencing in a wider range of indirect spend categories; e.g., professional services.
• Improved ability to manage quality of goods and services procured.
• Support in helping the retained procurement function deliver increased value to its organization and gain corporate visibility.

Changing Emphasis
There is an increasing awareness on both the buy side and sell side that the most appropriate delivery of the technology within procurement is on a hosted basis: IT services providers who still promote a major IT transformation are out of kilter.

Some offshore players such as Infosys are broadening their portfolio, from what has essentially been sub-process support to offer a full lifecycle source-to-pay service encompassing strategic sourcing, e-procurement, supplier management, contract management, and spend analytics services. Infosys is concurrently seeking to meet the talent management issue with a major training initiative to train employees on the latest global practices and requirements to be able to service clients with these new offerings.

Ethical or green procurement will also continue to grow in importance, and will increasingly be emphasized by service providers offering sourcing services.

In summary, NelsonHall expects that the long-anticipated acceleration in procurement BPO is about to happen, aided by factors including the tighter economic environment driving an increased focus on bottom-line savings (with management buy-in more likely), the worldwide dearth of talent, the enriching of the vendor landscape with the development of capabilities in both smaller onshore and major offshore service providers, and the development of a more attractive hosted delivery model. These will overpower some of the inhibitors we have noted in recent years.

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