04 January 2007
This year procurement outsourcing looks set to grow, with China the favoured destination for offshoring. Paul Snell examines the predicted impact on buyers
Experts forecast this year will see procurement outsourcing move out of the shadow of its bigger business process outsourcing brothers and become a major market.
Despite getting off to a slower start than HR, finance and accounting, it's predicted that procurement outsourcing will be a "game-changer" in the sector, with cost reduction as the primary impetus for its growth.
Analysts at the Everest Research Institute say that outsourcing the procurement function of a company could provide five times the savings usually gained from outsourcing other departments. With an incentive like this, it isn't surprising that more buyers and suppliers are attempting to get into the market.
"Some companies see procurement outsourcing as a way of improving their procurement level and their spend efficiency," says Phil Fersht, vice-president, BPO group at Everest.
The primary focus is gaining control of indirect spend. Fersht says this is a category that has been neglected by buyers, who are focusing on strategic and high-value procurement activity. Many firms believe they are "leaving money behind on the table". "Companies are recognising that buyers don't have enough resources to deal with all the indirect spend," Fersht says.
Yet cost savings are not the only motivation. Buyers and those further up the corporate hierarchy are pointing to improved efficiency, smarter strategic sourcing and the enhanced compliance that outsourcing brings. But as the market develops, so does the controversy related to it. The contract to outsource NHS work to DHL and Novation (News, 21 September) - 2006's largest procurement outsourcing deal - sparked a big debate.
Buyers are also concerned that outsourcing will shrink their area of responsibility or, in a worst-case scenario, put them out of a job.
"Firms have to reassure buyers that they are moving up, doing value-added things and less administrative work," says Vinay Couto, vice-president at research firm Booz Allen Hamilton. He believes that firms are getting better at supporting their workers. "Companies are more thoughtful about change management now," he says. "There is more open and honest communication up front."
The traditional perception ofoutsourcing is the moving of jobs from one country to another and procurement will not be the exception to this rule.
China, closely followed by India, tops the list of destinations for offshore procurement functions. This is because China is a low-cost country sourcing area. As many companies have no established base there, the quickest option is to outsource work to a third party, or to get involved in a joint venture.
"Wouldn't it be great to have procurement in the same place as R&D and product development, to understand relationships?" says Couto.
Yet the level of procurement skill in both countries is perceived to be behind that of Western nations. Couto says that firms should use their own procurement team to help develop their skills.See 2007 predictions in What's on the cards? feature