Procurement Sourcing: High Cost Savings, but Why are Companies Hesitating?

Procurement is a trend that has been rocking the outsourcing boat lately, as firms realize that leaving aspects like vendor selection and spend management to specialists allows them more freedom and resources to run their business effectively. So why are so many C-level executives hesitant to leverage this strategy?

We sat down with procurement experts from ScottMadden Consulting and Denali Group to understand what the risks are, and whether procurement can really optimize sourcing, or will be just another passing fad. Read on for more.

Real cost savings

When done right, procurement sourcing can be extremely effective in generating additional value from an outsourcing venture. Especially after the recession, cost savings are first on executives’ agenda, and obtaining more expertise than they may have in their company is a great way to do it. In a 2004 study that surveyed 750 senior procurement, supply chain and CFO professionals, Aberdeen Group found that through procurement sourcing, “companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%”.

For those who think those results are dated, think again. Procurement continues to yield costs savings today according to Brad DeMent, Partner at ScottMadden Consulting. “We’ve seen companies experience as much as 30-40% savings on some spend categories. If you’re spending $60 to 80 million on a project, those are significant savings”.

Apart from the financial advantages, procurement specialists also have more domain expertise in buying services, consolidating vendors and negotiating deals. In outsourcing, the name of the game is size and influence. If you’re just one company, you’ll need to create an internal team which will spend a lot of time and money educating itself, and will probably still come up short in terms of purchasing know-how and connections. The procurement mantra is, ‘Get back to your core competencies; outsource the purchasing to people with the expertise’.

How involved is your procurement partner?

Even if executives become convinced of the value of procurement, they’re never sure what the division of responsibility should be. Which outsourcing aspects must be handled in-house, and which are best left to the procurement specialists? “The difference is between strategic and tactical functions”, says John Evans, Managing Partner at Denali Group. “Make sure you keep things like category management and sourcing strategy in-house. Same goes for analyzing your overall offshore spend. But issuing RFPs, managing the supply base during those RFP events, sourcing events – these can be outsourced since they’re tactical and don’t have much strategic value”.

There are usually three levels of involvement of procurement firms in your business, depending on how much experience you have within your company. At a basic level, the provider will simply streamline your purchasing, and improve compliance and process efficiency.  Slightly more involved is when the provider manages day-to-day functions of the supplier, and helps with policy enforcement and reducing costs – all tactical functions.

The highest level is when the procurement firm provides end-to-end strategic management of your outsourcing operation, including spend management. That control of strategic spend such as raw materials and specialized machinery is something you should think carefully about before outsourcing, and executives are understandably cautious. However, says DeMent, it’s where the real costs savings are. “The companies we’ve seen that have gained advantages in procurement are the ones that outsourced more supply chain functions including strategic purchasing and spend management”.

Still the early days

Procurement sourcing is a trend only a few years old, and has caught on in some industries more than others. According to Evans, it’s most visible in the high tech sector and financial services, but the problem is the small number of vendors in the procurement field.

BPOs masquerading as procurement specialists

One problem with a lack of vendors in an industry is that firms with limited domain expertise rush in to fill the vacuum and grab early business. That’s the case for several large BPO and IT firms that have opened a procurement wing, but remain focused on the traditional outsourcing methods of automation, low-cost country labor and fixed cost reduction. “There’s much more integration required for procurement; it’s not just handling transactions that are black and white”, says Evans. “Your provider has to understand your business goals and requirements, and work hand in hand with the third party supplier, often onsite”. This is one of the reasons executives today are still hesitant to leverage procurement sourcing – they don’t know who the good firms are, because there are too few in the market.

“There are only a handful of large vendors who have built a name in this space over the past four to five years. They have acquired substantial expertise”, says DeMent. “The rest are going to have to prove themselves. Companies are waiting to see more success stories before they become comfortable outsourcing non-transactional supply chain services such as spend management and vendor sourcing”.

Nearshore procurement?

Strategic procurement is not being outsourced much to Latin America, or even India or China for that matter. Instead, many tech players like TCS, Infosys and Genpact prefer to operate through partnerships with procurement organizations. One thing is clear: if this is a trend that continues to grow, we’ll see more and vendors entering the market, which can only be a good thing.