The benefits and the challenges
Now that we’ve finally reached a more stable political situation, many private and public sector organisations are dusting off strategic initiatives. Will 2020 be the year that procurement outsourcing makes a comeback?
Whilst we must declare a vested interest (as a transformation and procurement consultancy), we are very much in favour of clients outsourcing their procurement function as it really can drive significant differences in the return on investment and results that are achieved.
Think of outsourcing procurement as comparable to outsourcing Legal, IT or HR which is common place, allowing a business to benefit from highly-skilled procurement specialists who have access to extensive and relevant networks, and can manage (independently or supporting existing internal functions) areas such as: sourcing, spend analytics, category management, compliance, contract management, invoice matching and projects.
A recent industry procurement whitepaper states “…on average procurement outsourcing can deliver improvements in spend under management (18%), contract compliance (31%), savings from sourcing (28%) and reduction in operational costs of 15-20%, that are above and beyond the levels typically achieved by internal procurement departments.
Figures not to be sniffed at, yet why do so many organisations fail to recognise they can genuinely achieve “first mover advantage” by outsourcing procurement / purchasing, freeing them up to concentrate on the core business that they’re good at?
Some of the key benefits that can be achieved are:
• Take advantage of external structures, expertise, technology or market leverage – following in the steps of many global organisations, more and more public bodies and SMEs with limited internal purchasing resources or skills are taking advantage of these benefits.
• Savings that can be reinvested in other critical business areas for example
– headcount – replacing a permanent line on the P&L with a variable line
– training – reduction in professional qualifications and ‘soft’ training spend
– offices – cost and space savings
– technology – world class outsource providers should include the latest sourcing and contract e-procurement tools and solutions in the service cost which is often a hidden benefit as many organisations struggle to obtain funding to update their existing technology
• Cost reduction and cost mitigation – annual returns totalling three to eight times the fees of the procurement service are typical. Good outsource providers will be prepared to put their fees on the line when committing to delivery of services. This risk and reward model can provide CFOs with financial assurances and focus for the outsource provider
• Superior Market leverage – improved discounts from suppliers and greater compliance as the supplier builds trusted partnerships with the procurement outsourcer who can support them across multiple clients
• World class knowledge and skills – for example they will have market knowledge and experience of multiple or industry specific supplier landscapes (UK and international) to ensure best fit suppliers are identified and selected. They will possess fantastic negotiation skills which will be more effective and will yield greater returns and they are also more likely to be up to date with latest trends and innovations
• Improved insights to make better purchasing decisions – data analytics, management information, spend/risk analytics and dashboards – good outsource providers thrive on the technology and skill they provide in analysing and making best use of data
Some organisations may wish to outsource only indirect areas such as Marketing, IT, Telecoms, Professional Services, Travel, etc. which can often be up to 40% of the total costs of a company but is often under supported creating missed saving opportunities and at worst significant risk issues.
There are of course some challenges that can arise from procurement outsourcing such as:
• Loss of control – there can be concerns that the business will lose the control it retains from an internal resource. This can be mitigated with a well-controlled outsourcer with clear deliverables, SLAs and KPIs, especially where the outsourcer is already proactively results driven in its culture
• Weakened supplier relationships – organisations may be nervous about handing over management of supplier relationships. However, with key SLAs in place between all parties, there should be little risk (if not improvement) to existing supplier service performance and no reason why internal resources cannot continue to be involved with key suppliers
• Continuity of service – transitioning to and exiting from an outsource provider may be time consuming or costly. Counter argument would be – is this any real less time consuming or costly than replacing key permanent staff?
• Integration of outsourced technology – this can be de-risked by adopting a modular approach to technology to avoid putting all your eggs in one basket. This can be tricky if you are storing all your supplier contract data on an external system, however some due diligence means most external systems are adaptable, with data easily transferred in multiple formats or brought in-house at a minimal cost if required
Procurement can be complex, costly to develop and maintain and with more and more businesses focused on the in-year number. CFOs/CPOs are being asked to deliver more with less so it’s worth considering what will maximise savings and deliver business performance – creating a new high performing in-house procurement function, developing your existing procurement function or outsourcing procurement to an already high performing team.