Contemplating outsourcing procurement pros and cons | by Andrew Hillman

Andrew Hillman AltProcurement outsourcing is generally defined as the handing over of the management of some, or all, of the procurement processes or functions to an external specialist service provider. The primary aim is to achieve greater spend visibility, reduced procurement costs, and improve savings.

Procurement outsourcing can be either full or incremental. Full procurement outsourcing entails using an outsourcing provider to manage all aspects (all processes and categories) of the source-to-pay cycle (S2P). Incremental outsourcing, on the other hand, involves using an outsourcing provider to manage either distinct source-to-settle processes across all categories of spend, all source-to settle processes across specific categories of spend, or a combination of these approaches.

Outsourcing procurement is a relatively new market strategy that has been adopted by CPOs around the world to help reduce cost and increase efficiency of procurement departments. It stands between transactional procurement activities, usually outsourced by mature procurement organisations, and end-to-end category management services, typically retained ‘in-house’. Many companies in various industries outsource their tactical procurement and other activities that support the procurement function. These may include:

• Tail-end spend management and tactical (non-strategic) procurement
• Supply market analysis
• Spend analysis and savings reporting
• Sourcing support and supplier due diligence
• Contract administration

In-house procurement departments typically focus their available resources on strategic categories, leaving secondary categories unattended and/or mismanaged. Once efficiencies are achieved in strategic procurement, only then do they typically turn their attention to the secondary categories and transactional procurement (P2P) to achieve further cost savings.

Getting strategic
The key question that a chief procurement officer should ask when considering outsourcing procurement is: What to outsource? The start of finding an answer, is to fully understand the organisation’s spend. Only when there is full visibility into third-party addressable spend can one consider how to best manage that spend. Here you might benefit from a robust analytical tool that employs the right machinery to analyse and categorise third-party spend, together with the ability to present the results in meaningful data dashboards.

Procurement outsourcing should be a business decision based on the need for efficiencies and cost containment. Control of specific end-to-end procurement processes is relinquished to a service provider, and thus internal processes, relationships and procurement maturity, should be favourable to allow outsourcing to be implemented.

Going independent
Procurement outsourcing also refers to the transfer of ownership of some, or all, procurement processes or functions to an independent service provider. The scope of procurement outsourcing is typically defined across two dimensions:

1. The process scope for procurement outsourcing covers the end-to-end, source-to-pay (S2P) process that comprises source-to-contract (S2C) process and transactional procure-to-pay (P2P) process, as illustrated in the diagram below.

2. The second dimension of procurement outsourcing is the category scope. This includes the various spend categories such as, IT/telecom, marketing and sales, facilities, office supplies, travel, logistics, contract labour and maintenance, repair and overhaul (MRO). This should be predefined and understood before a spend category can be outsourced. Consideration should made about what commodities and services are core to the business and which are not.

A partnership in practice
Beyond process and category scope, a procurement outsource relationship is also defined by the geographic scope and the value of procurement spend (that the service provider will be responsible for managing) on behalf of the client.

Procurement outsourcing typically involves long-term (36-60 months) day-to-day management of a group of procurement sub-processes (for example, requisitioning, supplier management) and for multiple category groups (such as administrative supplies and equipment, industrial supplies and equipment, telecom, IT hardware, travel, raw materials, etc.).

Weighing the pros and cons
Some of the benefits that can be gained from procurement outsourcing are:
• Cost reduction from head count, training, office space and computerisation.
• Market leverage allowing for better discounts.
• Transaction cost per purchase are lowered by economies of scale.
• Marketing knowledge of which suppliers are best for each product to be purchased.
• Highly skilled staff that specialize in purchasing.
• Improved communication between purchasing experts and the company staff.
• Better management information and purchasing analysis is available for people who understand the purchasing environment.
• Globalisation means that the same products are often required in different countries.
• Negotiation by an expert in the field is often more effective and profitable.

There are, however, also several key problems that may arise from outsourcing:
• Choosing which component or part of the procurement functions and spend categories should be outsourced – fundamentally relates to risk and regulatory compliance
• Lack of readiness – the operating model must be clearly defined. What is to be outsourced?
• Continuity of service – long implementation lead time
• Reduction in control
• Enabling effective communication
• Cultural misalignment (including market and regulatory requirements)
• Or a lack of acceptance and buy-in by organisation

The diagram below represents the three Procurement Function strategies, developed by Bespoke Group Africa, that should be considered for outsourcing procurement:

Procurement Outsourcing Strategy Image
Some indicators of best practice in procurement are:
• Detailed spend analysis into category groups and commodities across the enterprise
• Strategic sourcing of key commodities and services in-house
• Cost reduction achieved relevant to cost of the procurement service
• Percentage of spend under management
• Percentage of contract compliance
• Visibility and management of supplier performance
• Benchmarking and continuous monitoring of market indicators and supplier intelligence

A procurement capability assessment will inform the current maturity of the procurement organisation and your readiness for outsourcing procurement. Once it is understood at which stage on the maturity continuum your organisation is positioned (i.e. stage 1: reactive, stage 2: developing, stage3: partnership, stage 4: alliance or stage 5: world-class procurement) can the key following questions be explored:

1. Why do we want to outsource procurement?
2. What do we want to outsource?
3. When do we embark on outsourcing procurement?
4. How should we approach procurement outsourcing?
5. Who will be affected by outsourcing (internal and external stakeholders?

To determine where a procurement organisation is situated on the procurement maturity continuum, an organisational assessment of the current procurement function should be conducted with the objective of determining the factors that tip the scales towards either outsource, in-sourcing or a hybrid procurement strategy.

This, coupled with spend analysis, will provide the right data and information needed to conduct a meaningful conversation about outsourcing your procurement and how to reach the right decision for your organisation.

Andrew Hillman is CEO of Bespoke Group Africa and Publishing Editor of Bespoke Bulletin - www.bespoke.co.za

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Posted on July 10, 2018