Procurement Outsourcing Market Expected to Continue Domination

Procurement Outsourcing. Image source

The procurement outsourcing market has been gaining prominence in the global market. The phenomenal growth of 10 percent registered in 2012 meant that the market reached a total contract value of 1.72 billion US Dollars with nearly 220 billion US Dollars in managed spending.

Understanding the growth of Procurement Outsourcing

Industry experts expect this graph of growth and profit to continue in 2013. The growth in the market is being bolstered by manufacturing companies, consumer goods, financial services, telecom and hi-tech services. The number of companies that are adopting procurement outsourcing is increasing by the day.

Apart from the companies that are relying on outsourcing, the sector growth is being bolstered by the need to update technology with time. Further the economic considerations are forcing companies to choose means to cut down on expenditures while still retaining quality considerations. The procurement outsourcing market is expanding and encompassing financial and accounting processes alongside several supply chain activities.

Major vendors in the arena are IBM, Accenture, Infosys, GEP, Xchanging, Procurian and Genpact. While IBM and Accenture are the key players with a combined market share of over 50%, some Indian players are currently changing the market shares. A combination of all the factors listed here are responsible for the current growth and the prediction that the market will continue to see further growth in 2013.

Tracking the Procurement Outsourcing  market

The market has always seen a steady growth over the years. If one were to track the growth since 2007, an annual growth rate of 18% may be observed. This growth has been tracked by Everest’s Procurement Annual Report 2013. The growth rate was tracked in terms of the total contract value or TCV.

Procurement outsourcing has remained steady in terms of average contract size while other types of outsourcing markets have seen a dip in the average contract sizes. The procurement market is largely dominated by the large scale buyers. The small and mid-size businesses also have a stake in the market although it is not comparable in size to the large buyers.

The Everest report also placed emphasis on the contracts that serve multiple continent buyers. Nearly 38% of the total contract value was multiple continent buyers in 2012. With the increase in these contracts vendors are also being forced to expand capabilities and operations to various continents particularly in South East Asia, China, Central and Eastern Europe.

The analysts at TechNavio forecast that the global procurement market will grow at a CAGR of 23.14% between 2012 and 2016. This growth is fueled by the need for business organizations to reduce costs significantly through changing the current price models is a current need. The limitations for the growth graph is the lack of or limited domain knowledge.

What drives procurement outsourcing?

The Everest Annual Report claims that while spend reduction is the raison d’etre for outsourcing, the procure-to-pay scope is more or less driven by the need to reduce operational costs.

The report also spotted another trend of buyers entering procurement outsourcing relationships in order to minimize errors in payments and also to improve on planning and forecasting. Analytical tools and analytics are finding leverage through procurement outsourcing.

The focus of outsourcing has always been on indirect spending. The focus is now shifting to direct spending such as with outsourcing maintenance and repair overhaul spending also known as MRO and tail end spending.

The Vice President at Everest Group Saurabh Gupta was quoted as saying, “Arbitrage-led operating efficiencies account for only 15-20 percent of the overall savings potential from PO. A majority of savings in PO is derived from procurement spend reduction and compliance. This only now is becoming efficiently enabled by indirect category expertise and access to new technologies that service providers are now beginning to invest in. With the success and growth that PO has had over the last few years, it provides new lessons in value creation to the entire BPO industry.”

The future of Procurement Outsourcing

While the future looks ripe in the current market conditions, vendors are likely going to need to step up in the direct spend categories. The particular direct spend category is especially challenging as the category demands specialists and domain experts who are very hard to source. The latest technologies that are flooding the market like cloud computing, mobility, social media and big data analytics are all challenging the market for procurement outsourcing.

The clients in the market are looking for vendors who have an interest or are critical stakeholders so that they will be interested in improving the efficiency of their business and return good profits. The clients are also looking for domain expertise and services that will significantly impact their businesses.

Procurement outsourcing vendors are not far behind in stepping up to the client requirements. The vendors are using nonlinear strategies like platform based offerings, products and intellectual property patents and outcome based pricing. These strategies are meant to increase the vendor’s revenue.

In the larger picture, procurement outsourcing will be a key component in the Business Process Outsourcing industry. The growth of the BPO industry will be bolstered by the PO industry. The procurement market will be the reason for increase in revenue and margins for the big players in the market. The current Indian BPO companies that have a stake in the procurement outsourcing market like Infosys, Wipro, TCS and HCL Tech are expecting good returns on their investments in the future.

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