PROCUREMENT OUTSOURCING: THE NEXT BIG THING?

By M H AHSAN

Procurement outsourcing has become one of the fastest-growing segments within finance and accounting outsourcing. More firms are now looking at outsourcing across the procure-to-pay process to consolidate sourcing, vendor management, and vendors spend. This helps companies realize the benefits of strategic sourcing and leverage sourcing savings that have been identified but have not been used due to lack of communication, processes, and systems. Outsourcing along the procure-to-pay lifecycle has helped clients reduce process costs and cost of services and products purchased, and has provided them world-class technology and human capital, which they couldn’t have otherwise afforded.

These outsourcing initiatives have also enabled internal resources to focus more on strategic procurement activities. The importance of procure-to-pay outsourcing is further highlighted by a recent survey done by Gartner, where it found that although in-house procurement departments had a satisfactory performance on cost reduction, their performance based on contract management, governance, and customer service were extremely lacking. The research clearly shows that internal procurement departments have failed to provide the necessary set of tools and services to reduce costs, manage contracts, and provide good customer service both internally and externally, thus validating the need for an outsourced model. A recent study conducted by EquaTerra indicated that outsourcing providers were able to provide higher savings than internal client set-ups in one of the following ways:
· A lower cost structure and incentive-based employee compensation
· Standardized sourcing methodologies
· Economies of scale in sourcing
· Focus on governance, contracting, and transition

The study also found that providers are able to increase savings by using a multi-shore sourcing approach in low-cost locations. Another important conclusion is that the market size for F&A procurement outsourcing, at present, is approximately $20.1 billion and is growing at a rate of 13.1 percent annually. Several large service providers have extensive procurement sourcing offerings, which leverage the multi-shore model to provide efficient sourcing services to clients at lower costs.

As part of the offering implemented for a leading automotive company, indirect procurement sourcing was offshore to an operations center in India. In an unprecedented outsourcing model, assistant buyers from the providers India facility are able to negotiate with the vendors, manage the catalogs, and order new products through the clients e-procurement system. The approval and contract signing is done by the clients senior buyer in the United States. This model has helped the senior buyers focus on more strategic activities in-house and has dramatically reduced the operational costs for the client.

The provider also leverages its workflow tool to deliver spend analysis to the buyers by commodity and by vendor, so that they are able to leverage their relationships and negotiate better prices with the suppliers. The spend analytics provided in the procurement sourcing offering also provide an opportunity for senior management to verify the effectiveness and efficiency of the purchasing organization. Most outsourcing companies also build a vendor portal in their technology offerings to help facilitate ease of use for the vendors and to provide a central repository of information for all the vendor invoices that have been paid or are pending payment. Portals also provide images of all other relevant documents.

The deployment of technology toolsets has greatly assisted companies in effective contract and vendor management. Recent trends and outsourcing deals have shown that procurement outsourcing is growing rapidly and can provide demonstrable savings to clients with relatively less complexity during the transition stage. In all probability, it is fair to state that procurement outsourcing is the next big thing in finance and accounting outsourcing.