The boom year that wasn't

16 January 2008
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16 January 2008

As research reveals 60 per cent of companies have no intention to outsource their procurement, Paul Snell asks what happened to the 2007 boom predicted last year

Just over a year ago, experts proclaimed an explosion in the procurement outsourcing market in 2007 ("Outsourcing boom", News, 4 January 2007).

They described the market as "red-hot" with the number of deals signed having reached a "critical mass".

Twelve months on those claims are looking a little over-heated, as 60 per cent of firms still have no intention to outsource their buying team. So what happened?

The key is to concentrate on the 40 per cent who are interested, says Bill Browning, research analyst in global supply management at the Aberdeen Group, and author of its report, Procurement outsourcing: a strategic imperative?

"2007 was not necessarily a big boom year, but the market continued to build and it takes a while for it to gain traction and a critical mass of companies who will be leaders," he says. "It is still at the building stage."

Saurabh Gupta, research director at the Everest Research Institute, whose studies prompted last year's headlines, agrees. "In 2007, the procurement outsourcing (PO) market grew at a steady rate in terms of managed spend and contract value.

"Even though there wasn't explosive growth, the developments in the market have been positive in terms of rising buyer interest. We also saw several new suppliers entering the market," he told SM.

Further, he says the volatility of supply and demand in procurement has meant the market is now in a "see-saw" pattern. "These hurdles are typical of a market in a pioneer stage, but the emerging trends are bullish."

He adds the number of current PO deals is now more than 100 globally, which bodes well for future growth.

As businesses continue to face increased competition and financial pressure, cost savings are still the main driver for outsourcing purchasing. According to Aberdeen, the best firms can achieve savings of just over 8 per cent, with most achieving cost savings of more than 7 per cent.

But unlike other types of outsourcing, such as HR, finance and and IT, where cheap labour is the aim, for procurement the key is to reduce spend costs and, essentially, use the expertise of outsourcing firms to access more competitive prices from suppliers.

"The cost base that PO addresses is substantially different from the cost base that other outsourced functions address," says Gupta. "The primary cost baseline that PO addresses is the procurement spend as opposed to the operational cost. The spend represents potentially far greater savings than traditional outsourcing but also renders the PO process challenging."

And Everest research highlights another difference - the lack of offshoring. The average percentage of work conducted offshore in a PO contract is just 26 per cent, compared with 69 per cent in finance and accounting.

But Gupta says this could be about to change. "Recently the role of global sourcing (and offshoring) is expanding in the PO market. Several offshore-centric players such as [outourcing firms] Infosys, Wipro and Genpact, are also entering the market. At the same time, suppliers are moving closer to the markets."

He adds that Eastern Europe and South America are quickly emerging as popular destinations for outsourced procurement work, boosted by their proximity to local markets.

According to the Aberdeen report, the biggest challenge for buyers with procurement outsourcing is managing the relationship with the provider.

Browning says it is critical to get this right from the start. With 67 per cent of buyers judging the success of an outsourcing relationship on cost savings, it is particularly important to make sure measurements are understood, metrics are agreed and the right service-level agreements are in place in the contract.

He says: "At RFP stage, outline clearly what percentage of cost savings you expect and from which specific categories they should come."





SMjan2008

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