When is – and isn’t – procurement outsourcing right for your organisation?
This article originally appeared in Outsource Magazine Issue #29 Autumn 2012, as part of a portfolio feature entitled ‘Procuring Excellence’. To read the other parts of this feature, see the introduction and index here.
First things first: there is not one type of procurement outsourcing (PO).
In this article we refer to PO as the complete transfer of responsibility for managing a proportion, or all, of the cost base to a third-party provider (not just the management of processes associated with P2P or AP). Activities included within PO include:
- Business partnering (often right up to and including the CPO role)
- Implementation and change management
- Spend analysis
- Supplier and contract management
- Supplier on-boarding/help desks
- The provision of all the associated technology
So having cleared that up, let’s now look at the characteristics of an organisation that should consider outsourcing their procurement:
- Generally, to make the business model stack up, for both the buyer and the service provider, PO services are typically consumed by large (>£500m annual revenue) and complex businesses.
- A business that is culturally more willing to be challenged, has clear objectives for what it wants to achieve (not a step-by step plan on how it’s going to be achieved) and is more willing to embrace change will be more likely to maximise the true benefits of procurement outsourcing.
- As with any change programme, there must always be a burning platform sitting behind the decision to outsource. In procurement, this might be a need to improve profitability, transform the capability of the as-is or change the overall cost management culture of the business.
- It’s worth noting that PO can work at any stage of an organisation’s procurement maturity journey. It’s not just for those with advanced capability looking for where to go next – an organisation with no procurement function can leapfrog the maturity journey by several years through outsourcing.
In reality, however, procurement is all about building relationships and trust with the stakeholders it hopes to serve, and then positively influencing their behaviours. Therefore, to define the characteristics of the perfect procurement outsource organisation, it’s equally important to consider the human side, and look at the business leader that is buying the service.
Some of the characteristics we would expect to see in this individual are as follows:
- An interesting reality of most procurement projects is that they are cross-functional. So PO should appeal to business leaders with a change agenda, a progressive view of the world, a willingness to embrace ideas, a desire for innovation and someone who is open to having his/her business positively challenged and put under the microscope.
- A business leader that has strong links to Finance and has the power and capability to make things happen. PO will deliver a significant return on investment, which can materially impact profitability if, and only if, the mechanisms are in place to capture the benefits.
- A business leader that understands that the long-term value proposition of procurement is not to achieve savings, but to deliver value for money over the long term. Procurement outsourcing will not only transform the management of the cost base, but it will also ensure it is optimised on an on-going basis.
Procurement outsourcing has something to offer every large business, benefits that go way beyond just achieving a large return on investment. And because it’s not simply about outsourcing a process, educating yourself about how it can work, and understanding how it can improve your existing capability is paramount to enabling you to make an informed decision.
By Tom Lawrence, Chief Communications Officer, Proxima