Wednesday, June 21, 2006

Why Procurement Outsourcing is coming to a company near you

First, let me start by saying I should have outsourced my blog this month. I'm frankly astonished by how well the traffic has held up despite this only being the 3rd installment of the stuff this month. Thanks for hanging in there.

While I haven't been writing, I have been doing some reading, which has caused me to think about the procurement outsourcing business. Procurement BPO has recently been discussed in in Spend Matters, Supply Excellence, and e-sourcing forum among others. IDC is expecting 22.3% compound growth over the next 5 years. A lot of these posts have focused on the rate of adoption, the fundamental question of whether or not its possible, and opportunities and shortcomings of the marketplace.

In my opinion, the rise of outsourcing solutions like Ariba, Inc.'s Managed Procurement Services is inevitable and in progress and here's why...

1. Companies have already outsourced sourcing and procurement for some of their most complex direct materials, proving that outsourcing works and is effective. The tiering of the supply base by OEMs has effectively outsourced sourcing and procurement of a large percentage of the material content of products to a handful of "systems" suppliers. They've pushed the risk of component availability and pricing for these system's to their outsourced provider. Sure, Dell's supplier produces the components they sell, but it's not just component manufacturing they've pushed out the door, it's sourcing and procurement as well.

In these cases, the product delivered to the end customer serves as a proxy for the service level agreement. Dell knows exactly what it will receive and when it will receive it. For non-product spend, many companies lack that SLA or a proxy. Their procurement processes are relatively immature or undefined. The development of centralized or center led procurement organizations is a stepping stone to the maturity of process understanding that is required to establish the outsourced relationship and govern it.

2. Value proposition. Like other outsourcing markets, there is opportunity to save money through labor arbitrage or the application of technology that a company might not otherwise invest in. Unlike most opportunities there is the lever to influence the cost, price and value of the goods and services received. The value proposition does not rely on merely being able to do the same thing more efficiently, but by being able to focus leveraged resource in a way that delivers more effectively.

3. Accountability. In technology and consulting relationships, they're is occasionally some tension between what the consultant estimates as the benefit produced by a recommendation and the benefit that the the company perceives that it actually realizes. Is it the strategy that didn't fulfill it's promise, or the employees of the company that implemented the strategy? Theoretically, an outsourced procurement relationship should give you access to the best practice methodology and knowledge that attracts you to the consultant with the added benefit of accountability -- the ultimate in "you think you can do it better, then prove it." The best part is because of the magnitude of the relationship and the long term duration, this accountability should come at a discount to a consultant's day rate.

There you have it 3 factors that are going to have companies plugging into the capabilities of procurement service providers -- and I didn't even have to fall back on mentioning all of the other things that are already outsourced.

Later on, I'll talk about what companies can do to prepare to outsource...


At 2:43 AM, Anonymous Anonymous said...

Procurement is the first step to your supply chain. If you don't get that right supply chain may not hold strong. by outsourcing you not only bringing expertise but you bringing more participants in to the chain.


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