The outsourcing market has faced tough times in the past 18 months. It has become harder and harder to sign long-term deals in an increasingly competitive marketplace. Labor arbitrage alone is no longer a sufficient argument for companies to take on heavy and often risky restructuring efforts. “Cloud computing” is also breaking down the physical asset barriers that traditional outsourcing once relied upon. However, what does this all mean for procurement outsourcing? Is procurement still a function under the make-or-buy microscope? Is it a sustainable business proposition for BPO providers to just take on a company’s procurement operations without a foundation of IT or other finance business processes? When CPOs are involved in supporting the CFO and CIO in making outsourcing decisions, how open should they be to including their own “house and its contents” into the discussion?
All of these questions came to light in the 2010 AT Kearney’s Indirect Procurement Study. The study worked with procurement executives from 94 multi-national companies, who manage a combined global indirect spend of nearly $200 billion, to identify how they deliver leading results across six different dimensions of indirect procurement spend (see Briefing, below).
The results from the 2010 study differ dramatically from those of three years ago in terms of companies’ strategies, goals and perspectives on procurement outsourcing. Executives participating in the 2007 study had high expectations for significant growth in the outsourcing of strategic, tactical and operational procurement activities by 2010.
Fast-forward to today and the number of adopters show little, if any, movement from three years ago. The outsourcing of strategic procurement activities was projected to grow from 1 per cent of respondents in 2007 to 12 per cent in 2010: the actual figure today is 5 per cent. For tactical activities, 6 per cent in 2007 was expected to reach 23 per cent in 2010: the actual figure is unchanged at 6 per cent. Lastly, operational activity outsourcing was forecast to move from 10 per cent in 2007 to 40 per cent in 2010: the actual figure in 2010 is 14 per cent.
Furthermore, the outsourcing service providers of choice, which in 2007 were expected to comprise mainly business process outsourcing giants such as IBM and Accenture, turned out to be category-specific managed service providers with a narrower mandate.
Changed marketplace
The potential failure of external service providers, as illustrated by the accounting scandal at Satyam Computer Services in 2009, exposed the risks inherent in handing over strategic activities to outsiders. Indeed, risk has become the primary concern in deciding whether to outsource.
In 2007, 20 per cent of companies considering outsourcing, and 38 per cent of companies considering the use of a managed service provider, were concerned about the risk of losing control. In 2010, the concern of losing control for both of these models jumped up to 100 per cent. Furthermore, all of this year’s participants say they will not select a managed service provider or captive offshoring model owing due to misalignment with their existing organisational structure.
Asked about the selection criteria for choosing outsourcing partners, 2010’s participants report that a strong relationship and trust are the most important elements – more important than process competency. Category management expertise ties for second place and the ability to deliver a total solution ranks third overall.
Although indirect procurement outsourcing has not developed as quickly as expected, it should not be assumed that this trend will continue. In the meantime, the way in which organisations are structuring their procurement teams internally has also changed. In the 2007 survey, the largest single group of respondents (45 per cent) reported a mixed centralised-decentralised indirect procurement organisation with responsibilities split along function or category lines. Furthermore, 44 per cent expected that model to prevail in 2010.
However, the most successful model in 2010 is a centre-led procurement organisation rather than a mixed design. This model is comprised of a virtual team that works together for the greater good of the organisation but also relies on procurement professionals who both develop and maintain solid working relationships with key stakeholders and internal customers. The team based at head office collaborates with business units both globally and regionally to come up with optimal company solutions and procurement strategies.
Local leadership, support and expertise are particularly important when dealing with complex categories such as IT, marketing and professional services. Voluntary collaboration is essential if centralised contracts for such categories and arms-length mandates are to deliver on their promise. Users of this model in the 2010 study saved more than 10 per cent over the past two years in 47 per cent of categories.
Procurement’s evolution One school of thought
on this change in direction with regards to procurement outsourcing
plans points to the growing recognition of the importance of the
function itself. Procurement teams are making leaps and bounds in
raising their level of influence throughout their organisations,
building stronger internal relationships and boosting performance. An
increasing number of C-level executives understand how indirect
procurement can significantly contribute to financial results (cost
reduction and top-line/revenue growth), risk avoidance and value
creation.
This increase in influence, however, has not happened overnight. More
and more indirect procurement teams are taking a “no stone unturned”
approach and tackling complex goods and services including IT, marketing
and advertising, facilities management, professional services, and
maintenance, repair and operations (MRO).
The improvements are expected to continue. Procurement teams currently
say their influence is weakest in marketing and advertising, and
professional services. Looking ahead, however, procurement teams expect
the area where they will make the biggest gain in influence is overhead
and support, with facilities management and logistics following closely
behind.
By region, procurement executives in
developing and emerging markets expect to make the biggest increase, by
percentage points, in influence. For example, Latin American study
participants expect to be involved in 84 per cent of related spend
decisions in the future; today, they are involved in about 62 per cent
of such decisions.
Study participants from Korea,
China and Japan; India and south-east Asia; and Africa and the Middle
East are close behind with forecasts of 20-point growth in involvement.
Interestingly, procurement executives in North America have the highest
level of involvement in current spend decisions, at 68 per cent, and the
lowest projected increase in the future, as participants expect to
increase their involvement in spend decisions by only eight points, to
76 per cent.
A key consideration and risk is whether
outsourcing parts of the procurement function will benefit a CPO’s
ability to continue to improve their influence and value delivery.
Freeing up a procurement team’s time by outsourcing tactical activities
will definitely allow more time to be spent on category management
efforts such as strategy development, internal customer management,
supplier relationship management and continuous improvement. On the
other hand, if the outsourcer performs poorly, the team could be
spending more time on these elements.
When and howThe
“when” question, albeit an important one, should be supplemented with a
discussion on “how”. While industry and category expertise continue to
influence a CPO’s decision-making, process developments in provider
capabilities and advancements in technology should also play a large
part in the selection of a winning procurement outsourcing partner.
Most companies, for example, when applying analytics, focus on spend tracking
and management, and less on forward looking modelling techniques.
Advanced analytic capabilities, however, such as predictive modeling and
optimisation, can assist in identifying opportunities in the more
complex indirect categories that often require scenario analyses to
identify maximum value. The application of advanced analytics requires
not only a detailed understanding of, and access to, a robust data set,
but also the knowledge and information to make calculated assumptions
that will lead to informed decisions.
Advanced
analytics is one skill set that many consultancies and outsourcing
providers have invested in heavily to develop within their businesses.
If CPOs are holding back from outsourcing their entire team, significant
opportunities still exist to rely on ongoing outside analytics support,
or analytics as a service.
Developments in
technology are also changing the outsourcing playing field. Cloud
computing, for example, creates an unprecedented opportunity to reshape
the ways services are delivered. Cloud technologies enable users to tap
into computing power available via the Internet, rather than on a
desktop or computer server housed locally. This means that companies
such as Google and Amazon, current leaders in this area, could be
competing in some elements of the procurement outsourcing marketplace in
the near future. Alternatively, cloud computing aligned with software
as a service delivery models eliminate one of the most compelling
reasons for outsourcing – the need to invest in significant amounts of
hard-wired technology. For many companies, implementing and maintaining
comprehensive closed-loop-spend management systems behind their
firewalls is a very expensive business proposition.
When
included as a component of procurement outsourcing, the outsourcing
business case makes more sense. However, as procurement technologies
have migrated to the cloud and been deployed by technology providers on
an on-demand basis, that need for initial investment and ongoing
maintenance is eliminated and the outsourcing provider is left with
labour costs and potentially enhanced capabilities and business
processes as a compelling value proposition.
What can
we expect from the next survey into indirect procurement when asking
leading organisations about their procurement outsourcing efforts? All
we can be sure of is that the make-or-buy decision will be based on
right-sourcing (rather than outsourcing, in-sourcing, offshoring, or
on-shoring) – making sure you have the right provider, you are
restructuring the right procurement services for your organisation, and
you are benefiting from the latest advances in technology such as cloud
computing (driving lower costs, increased flexibility, and lower risk).
Briefing - How the study worked
Following AT Kearney’s initial study in 2007, the 2010 Indirect Procurement Study focused on how companies are becoming more efficient in the sourcing of indirect goods and services. Participants completed a detailed questionnaire with more than 1,400 evaluation points spanning six different savings levers for the successful management of indirect spend: influence, automation, organisation structure, tools and techniques, benefits measurement and key performance indicators.
The respondents included procurement and supply chain executives from 94 companies in 21 countries from North and South America, Europe and Asia-Pacific.
Study participant ratios are as follows (on average):
• 2.2 full-time employees work on indirect procurement activities per $100 million in third-party spend.
• 80 per cent of third-party indirect procurement spend is spread among 14.6 percent of the supply base.
• The equivalent of 0.4 percent of third-party spend goes to non-personnel related infrastructure costs to support the indirect procurement organisation.
The following are definitions for the strategic, tactical and operational activities in this study, and what they typically include:
•
Strategic activities: business strategy development, supplier relationship management,
stakeholder management, participation in multifunctional development teams, process
development, simplification and standardisation.
• Tactical activities: routine supplier communication, interactions with internal users, monitoring supplier service, problem resolution, supply market screening, demand analysis, category strategy development, supplier selection, negotiation of contracts,
process controlling, spend management, compliance management and supplier
performance management.
• Operational activities: requisition-to-pay, order placing and administration, order retrieving, order inspection, order registration, warehousing, change order management
and financial reporting.
Jan-Fokke van den Bosch (jan.fokke.van.den.bosch@atkearney.com) is a vice-president in the procurement and analytics division at AT Kearney, based in Amsterdam. Simon Rycraft is a manager in the procurement and analytics division, based in San Francisco
