Procurement Outsourcing, why?

Procurement Outsourcing: Context

Leading organizations have already outsourced a major chunk of IT services and have tested and proved that outsourcing and off-shoring works. Now organizations are clearly focusing on outsourcing their business processes to a specialist as they feel that most transactional activities done today are non core in nature. With current technology advancements in Internet and security it has become easier to manage and execute business processes from any location where good infrastructure is available. So this has become an increasing focus area for CXO’s to carve out core and non core activities within a process and outsource through a managed services model using captive or third party providers.

In this current economic situation companies seeking to improve their financial performance have already started looking at Business Process Outsourcing as a key enabler in streamlining business processes and also improving operational performance. While F&A and HR outsourcing have been around for quite sometime, procurement outsourcing is becoming increasingly accepted as a more viable strategy for both cost and performance improvements. The current trend clearly shows that companies are pursuing procurement outsourcing using as an incremental approach to test and prove the concept works.

Procurement Outsourcing: Defined

Procurement Outsourcing is defined as a process wherein organizations take a calculated approach of moving some of their processes around source to pay to a specialist. This involves organizations identifying the core and non-core activities with source to pay and start outsourcing non-core activities to a specialist. This process involves different approaches:

• Full outsourcing – Survey shows only 17% take this approach - Only leaders adopt this route.
• Incremental outsourcing – Survey shows 83% take this approach
• Hybrid approach towards strategic and transactional activities.

Today leading organizations are adopting PO as a key approach to improve corporate performance, standardize processes, and consolidate operations. Procurement outsourcing unlike other areas has an added advantage of achieving strategic value over and above cost cutting. The potential of procurement outsourcing is that it can deliver 5X potential savings compared to others.

Why Procurement Outsourcing?

Increasing interest in procurement BPO can be credited to its ability to provide two key benefits:

• Cost reduction
• Value creation

These two factors are of high importance to companies in today’s changing economic climate.

Procurement outsourcing is well suited for companies faced with mounting competitive pressures and rising demands to cut costs and bolster shareholder value. Also organizations with procurement operations that are overburdened by recent strategic moves such as mergers & acquisitions may find a viable solution in procurement outsourcing.

“£” saved is “£” earned, and companies can use these pounds in several ways: The strategic initiatives within the procurement organization can be made self funding based on the savings realized through procurement BPO or the same can be used for funding other strategic initiatives. An example is an outsourced category management process for logistics services with an annualized spend of £100m with a savings potential of 10% (£10m) will fund an organizations initiative of an eSourcing tool implementation within a company. This strategy works well for companies that continue to grapple with “maverick buying” and ineffective processes despite huge investments of time and money

How important is Procurement Outsourcing in today’s competitive economy?

Procurement department’s strategic importance is rising within an organization and has become a board level topic to improve cost, productivity and shareholder value. This is because a typical organization spends between 40% to 50% of its revenue on procured goods and services. This means any reduction in that 40% to 50% of spend is a direct impact on companies bottom-line. With an increased top management focus, comes a highly elevated performance expectation. Procurement leaders are therefore looking for external help and also applying a virtually integrated concept to buy non-core services from an expert who is an expert in doing that.

7 Step Solutions has a full suite of services to support the source to pay process. Please get in touch to find out more admin@7stepsolutions.co.uk