Procurement outsourcing is where a company delegates to a 3rd party service provider responsibility for sourcing and category management, typically for some or all indirect (non-core) categories of external expenditure. CPO’s and CFO’s in these organisations are recognising the unleveraged buying power and the additional value this could deliver. The savings from outsourcing procurement can be 5-6 times greater than the value from outsourcing other business processes. Outsourcing Finance may deliver 0.1% - 0.5% as a percentage of revenue in savings versus >2% from outsourcing the sourcing and category management of indirect spend.
The value outsourcers bring, besides access to specialist buying professionals, tools, technology, analysis and rigour (which most companies would not invest in managing indirect expenditure internally) is the market intelligence gleaned from doing multiple deals day in day out in these categories. They are constantly in the market and know all the suppliers; this market intelligence enables significant savings when contracts are negotiated.
Tasking your procurement service provider with full end-to-end category management, supplier management and demand management will also ensure those savings targets identified at the outset actually do get delivered. Most internal procurement functions can identify savings opportunities every year, the real challenge is in realising those savings through effective change management and compliance.
The supplier landscape is varied and mixed in this space, with some of the tier 1 outsourcers offering end-to-end Source-to-Pay solutions stretching beyond sourcing and category management into Sourcing Support (spend and market analysis, spot buying, eAuctions and contract admin); through to Procurement Operations and Accounts Payable. At the other end of the supplier landscape there are many smaller and very small specialist service providers focusing on sourcing and category management who will take on one or two categories only through to all indirect spend management.
The shape and commercials for Procurement Outsourcing are also varied. Many commentators in the shared services and outsourcing industry talk about spend consolidation and gain share. If they do, then you know they don’t know anything about outsourcing procurement.
Most procurement outsource deals involve a combination of service fees and bonus. Bonuses are often fixed or tiered and aligned to ‘realised’ savings targets or sometimes on a gain share (% of savings) basis. Usually there are arguments about multi-year savings and how to attribute bonus or gain share to these. Buying and contracting for Procurement Outsourcing is different from other forms of BPO.
How we can help you…
Based on UK, European and global experience, Alsbridge assists clients in identifying which categories could be outsourced, evaluate the size of the opportunity, and then help select and contract with an appropriate supplier.
We guide clients through the procurement outsourcing process and help transform internal procurement organisation. Key activities include:
- Assessing existing buying categories to determine the core (retained) and non-core (sourceable) activities
- Baselining your existing capability, tools and processes, to benchmarking against best practice and the supplier market
- Designing the internal procurement management organisation to move from a procurement role to an ousourcing services management role
- Supplier selection, contracting and commercials
- Measuring improvements in transaction effectiveness and supplier performance in all categories
To find out more please download our Procurement Outsourcing Research Paper:
Procurement Sourcing White Paper 2013
Reviewed European back office functions to uncover cost saving opportunities on behalf of a medical supplies group. First we identified annual savings of between €1.5m to €3m in indirect procurement costs, for categories with an annual spend of €30m. Second, we helped identify savings of €10m per annum through increased deployment of shared services, outsourcing and far-shoring.
To speak with a member of the BPO practice please contact Paul Morrison on +44 (0)20 7242 0666.