Procurement outsourcing to rise

20 January 2009

20 January 2009 | Paul Snell

The economic downturn will more than double the value of the procurement outsourcing market over the next four years, according to a study by analysts NelsonHall.

The size of the market for all aspects of outsourced purchasing is forecast to increase from $710 million (£489 million) in 2008 to just under $1.7 billion (£1.1 billion) by 2012.

The global market has experienced significant growth since 2007, when it was worth around $595 million (£409 million). The market in the UK alone is expected to rise by around $112 million (£77 million), from $95 million (£65 million) in 2008 to be worth $207 million (£142 million) in 2012. The report said companies would be "spurred by the global economic downturn" as they attempt to cut costs, and look to procurement outsourcing to achieve their goals.

Rachael Stormonth, vice-president at NelsonHall, said companies were more likely to consider outsourcing back office functions during a downturn, especially as procurement teams are under increased pressure. This impetus has accelerated in the past quarter.

In addition, providers of other outsourcing services such as finance and accounting would continue to develop procurement services, often through the acquisition of niche firms, also increasing the market size.

The study, of 70 companies across sectors in the US, UK and Europe, also found the amount of indirect spend controlled by providers as a percentage will rise from 16 per cent to 21 per cent by the middle of 2010. It said a quarter of the firms surveyed now use an external provider for some of their purchasing.

One driver behind the uptake of outsourcing is the dissatisfaction buyers feel with their category management, cost and control of indirect procurement. These are likely areas that firms look for assistance from a third-party. Stormonth added she expected to see a greater maturity in firms over what they see as "core" categories and vice-versa.

But there are still barriers inhibiting uptake. The main obstacle is that buyers do not perceive the market to be mature in terms of capability. Stormonth said purchasers are worried about supplier expertise. "Many providers claim to have a procurement outsourcing practice, but in reality they have some form of advisory or consultancy."

Other hurdles include loss of control, lack of support from senior management and unconvincing cost arguments. Concerns also remain that outsourcing procurement means job cuts, even though most third-party purchasing is about providing extra capacity for teams.

SMjan2009

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