How to create solutions that deliver value for procurement outsourcing.
 
By Katrina Menzigian and Attendra Dabas
 
The Procurement Outsourcing (PO) market has gained momentum over the past few years. The market has grown in bursts and continues to expand at double-digit rates. Buyers realize that the potential of procurement outsourcing is not just limited to traditional cost arbitrage, but also effective management of overall spend, which contributes directly to the bottom-line savings, especially for “non-core” categories.
 
Technology has always played an important part in the procurement outsourcing market. It has been viewed as an essential component in the path towards procurement transformation, along with the right combination of people and processes.
 
 
Role of Technology
When compared to other functions, we find that technology has a more transformational role in PO. In the FAO market, buyers have traditionally invested in streamlining their finance function using either ERP or legacy systems. Thus, most FAO buyers recognize technology as a key enabler and tend to have a more mature installed technology environment. For this reason, the technology approach most prevalent in FAO solutions is to make incremental changes to the existing technology landscape.
 
However, when we look at the procurement function, we find that few organizations have an existing, mature, procurement technology landscape. The procurement function is often fragmented and may be treated as a cost center. Therefore, many organizations do not allocate budget or actively invest in the latest procurement technology. As a result, access to technology has emerged as one of the key drivers for most PO buyers, along with access to talent, compliance, visibility, and operational cost saving.
 
Since technology and PO share a symbiotic relationship, bundling of the two is emerging as the best way to drive greater value in procurement. Bundling can add value to a PO engagement by:
 
Reducing TCO. Bundling allows the technology costs to be amortized over the life of the contract, lowers implementation and ongoing costs because of PO supplier scale and experience and, accelerates the time to achieve a robust solution
 
Improving service quality. PO transactions usually involved CXO sponsorship that can help drive compliance, financial incentives, and penalties; provides access to the latest technologies and best practices; and facilitates the required business process changes for successful technology implementation.
 
Lowering risks. Using technology allows transferring the cost overrun and service-delivery risks to the PO supplier.
 
Bundling in PO is significantly higher than other BPO areas like Finance and Accounting Outsourcing (FAO). This is evidenced by the fact that procurement systems are included in scope for almost 70 percent of PO contracts. Adoption trends closely mirror the division in supplier strategies. In the present PO market, outsourcing buyers have three choices related to technology strategy dependent on the existing maturity of the systems landscape:
 
Replace/refresh. It involves re-platforming existing technology or deploying a new S2P platform. It typically involves transfer of ownership and maintenance to PO provider.
 
Augment. In this type of engagement, the supplier integrates/upgrades existing infrastructure to plug gaps in an existing platform through the use of additional technology applications (e.g., hosted sourcing capability, wrapper tools to enhance process efficiency ). In such a situation, the buyer usually transfers maintenance to the PO provider but retains ownership.
 
Retain. Here, the buyer keeps the existing system but adds program management and reporting tools to further enhance capability. In this case, the buyer usually retains ownership and maintenance of systems.
 
 
Given the lower degree of buyer maturity in the procurement systems space, nearly 50 percent of PO buyers have leveraged supplier-owned systems, and nearly 35 percent of PO buyers have leveraged supplier-provided add-on tools (mostly to augment sourcing capability). The scope of these tools is usually seen to vary along three areas:
1. Process enablers (such as work flow tools, dashboards, and analytics);
2. P2P-related add-ons (such as Concur, and travel & resourcing apps); and
3. Sourcing-related add-ons (such as Aravo, Epic, and RealSource).
 
The technology landscape of a PO contract typically involves an underlying ERP solution (such as SAP or Oracle) along with a set of procurement-focused applications. These applications could include both procurement-specific COTS products (e.g., Ariba and Emptoris) and a PO supplier’s proprietary tools and technologies (such as Genpact’s SolPro, Capgemini’s BPOpen, or Wipro’s Base).
 
The PO supplier landscape follows a three-way division of approaches between sourcing-focused suppliers, P2P focused suppliers, and end-to-end S2P suppliers. Owing to their approach in PO market, most suppliers have adopted a similar approach in technology. Nearly 65 percent of PO buyers use different technologies for Sourcing and P2P (see figure 1). While ERPs continue to dominate the P2P space, procurement-specific COTS have a stronghold in the sourcing space. SAP and Oracle have traditionally been strong in the transactional P2P space and account for 90 percent market share or more within ERP-based vendors.
 
Procurement-specific COTS and proprietary technologies play a much bigger role in PO than in other functions such as HRO and FAO. Most procurement-specific COTS are either strong in the sourcing space or in the P2P space. Ariba has emerged as one of the few procurement-specific COTS with broad S2P capability. Emptoris has also gained significant PO market share over the past two years by leveraging tie-ups with leading PO suppliers such as Accenture and IBM.
 
The procurement technology vendor landscape has witnessed high M&A activity. Leading ERP providers have been actively involved in acquisitions and partnerships in the PO space. While SAP acquired Analytics (2008), Business Objects (2007), and Frictionless Commerce (2006), Oracle also acquired Hyperion (2007), 360 Commerce (2006), Demantra (2006) G-log (2005) and Peoplesoft (2004). Numerous partnerships exist between SAP and PO suppliers like Accenture, Crossgate, IBM, Infosys, etc.
 
 
 
The Future of Technology in PO
The role of technology in PO has continued to evolve and is poised to play a key role in the realization of savings for buyers in PO. Over the last few years the market has witnessed the emergence of several players offering SaaS as a delivery model. Players such as GlobaleProcure and Hubwoo have emerged and are providing hosted/on-demand technologies for sourcing and P2P. The scope of these SAAS platform/solutions can vary from sourcing, e-procurement, vendor/contract management, spend analysis, and compliance management to e-invoicing, content management, and more.
 
Even when we focus on the internal technology capability of PO suppliers, we find that PO suppliers have invested in tools, analytics, and other technology to close gaps and drive value from PO offerings. They are aiming to develop technology-centric offerings and are broadly taking two approaches to impact buyers through technology.
 
Add on tools approach. This involves developing technology tools that are non-intrusive to the core PO system and are “add-ons” to the periphery of the existing system landscape. They are usually point solutions requiring minimal change to the existing system landscape. Examples include process enablers (e.g., workflows, analytics) or P2P-related (e.g., T&E, catalog management, e-invoicing) or sourcing-related (e-RFX, e-auctions, category sourcing, etc.)
 
Platform approach. Here, companies use pre-integrated applications and pre-built processes, owned by a supplier, typically hosted and multi-tenant, with pricing built into the BPO contract. These solutions focus on end-to-end functionality and require a high degree of change to the existing system landscape.
 
While the tools approach is mature and has success stories to its credit, the platform approach is still being pioneered. While early adopters of platform solutions command leverage with suppliers, there are challenges associated with articulation of the value proposition, quantification of value, required investments, pricing, and sales.
In summary, buyers should leverage PO to gain access to the latest procurement technology. At the same time, technology is a value creation lever that enhances the overall PO value proposition.
 
However, buyers need to contextualize their technology strategy. A decision to replace/augment/retain should not be solely dependent on market trends, but rather should be based on the existing maturity of procurement systems and the organizational readiness for change. Managing and implementing change is almost always the biggest hurdle, and the buyer should assess and drive the internal readiness to accept change before launching into a transformation journey.
 
Comprehensive technology Go-to-Market is pre-requisite for the PO market. Keeping in mind the rapidly changing technology landscape in PO, it becomes highly important for suppliers to give technology its due importance in their service offering.
 

We recommend that suppliers adopt a target S2P technology portfolio to create value. PO buyers increasingly seek to expand the value derived from their PO engagements by linking sourcing activities with transactional procurement activities. In order to support buyers along this adoption path, PO providers will need a portfolio of enabling S2P technology, whether through internal development or partnering strategies.
 
Suppliers should leverage technology as a source of competitive differentiation and non-linear growth. Technology capability (in terms of experience and relationships with technology vendors and proprietary solutions) can help position the supplier as a partner to drive technology-led transformation where the buyer is looking for significant change and improvement. Technology can also help drive non-linear growth and better margins by driving standardization in delivery.
 
However, suppliers’ technology approach needs to be cohesive yet flexible. They need to adopt a segmented approach to target buyers depending on the initial need for technology-led transformation.
 
In conclusion, the procurement technology market is a dynamic space that requires continuous monitoring of the landscape and changing buyer needs. It is a value creation lever that enhances the overall PO value proposition. The close integration of procurement technology with procurement processes within one engagement model uniquely positions PO suppliers to drive greater cost savings, process efficiencies, compliance, and accountability from the procurement outsourcing solutions offered to clients.
 
Katrina Menzigian is vice president, Everest Research Institute. Attendra Dabas is a senior research analyst, Everest Research Institute.