Procurement Outsourcing Basics

Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party, aiming to reduce overall costs and enabling the company’s focus on its core competencies. The most popular outsourced are vendor management of procurement categorization, indirect materials and services.

Procurement Outsourcing in India

As the Indian BPO industry has matured considerably in the IT and ITES sectors, Indian service providers are looking for new and emerging opportunity areas where they can position themselves. Procurement Outsourcing (PO) is one such market, which opens the horizons for both global customers as well as Indian ITES-BPO players. Recent research on this segment has indicated that Procurement Outsourcing has the potential to generate the same revenue opportunity as the IT Outsourcing market.

Procurement Process Outsourcing is expected to become a new stream for Indian outsourcing service providers. In 2006, the procurement outsourcing market was estimated to touch US$ 1.1 billion. With a current growth rate of around 22 percent, it is expected to log momentum of around 100-150 percent in the years ahead.

According to studies conducted by different analyst firms including IDC, Procurement outsourcing is growing faster than IT services, Finance and Accounting and HRO outsourcing

 

The Benefits of Procurement Outsourcing

Recent research by Hackett Group and CAGR forecast for 2005-10 indicates that Procurement Outsourcing, though developed along with other BPO offerings; but shown growth in significant proportions.The research reiterates that Fortune 500 companies can save in excess of US$ 10 million annually by offshoring procurement to skilled manpower and low-cost destinations such as India.

Procurement Outsourcing can deliver significant efficiencies and more cost benefits. PO leads to reduced supply and operational costs, improved quality, cost, delivery, and compliance (QCDCTM) for organizations.

Types of Procurement Outsourcing

 

Types of Procurement
Types Features Quantity Frequency Value Nature Examples
Direct Procurement Raw Material and Production Goods Large High Industry specific Operational Crude oil in petroleum industry/Metals/Glass/Plastics/Textiles
Indirect Procurement Maintenance, Repair and Operating (MRO) Supplies Low Relatively high Low Tactical Lubricants, spare parts
Indirect Procurement Capital Good and Services Relatively low Relatively low High Strategic Machinery, Hardware, Office Supplies, Janitorial, Security, Freight, Telecom, Insurance, Consulting, contract labour, advertising, marketing, travel

Here are some different components discussed regarding Procurement Outsourcing and the business opportunities:

  • Direct Procurement-“Procure-to-Pay”: In Direct Procurement, the opportunity for outsourcing is very much transaction oriented. It is limited to the “Procure-to-Pay” process. Direct Procurement is primarily driven by
    • contracts and plans for manufactured goods,
    • impacted by changing demand
    • product configurations,
    • design factors,
    • complex quotation processes and
    • supplier capacities
    • focus in supply chain management, directly affects the production process of manufacturing firms

    A significant part of this work can be done offshore with roles like Buyers, Contract Administrators, Value Engineers, etc., where a company with enough expertise in the Procurement Outsourcing business. In the near future, strategic sourcing is unlikely to be outsourced, as it usually involves the deployment of highly specialized knowledge.

  • Indirect Procurement-“Source-to-Pay”: In the case of Indirect Procurement, the opportunity requires the service provider to offer the full breadth of capability including Strategic Sourcing. Under Indirect Procurement Outsourcing the following :
    • can offer lower spending on indirect goods,
    • improved access to an assortment of suppliers,
    • access of best in class practices and technologies,
    • lowering costs by leveraging employees,
    • access latest tools and provide transfer of work to lower skilled labour.
    • activities concern “operating resources”, procuring complex and costly products and services like heavy equipment and consulting services
    • from standardized low value items like office supplies

    Most of the work like Cataloging, Procurement Help-Desk and Contract Compliance, etc., can be managed on an offshore basis, which is again “Procure-to-Pay” kind of work other than cataloging. Currently, within the Indirect Outsourcing, Category Outsourcing is the most promising field but its growth is curtailed by a lack of suppliers offering these services in the flexible model. Currently, the market is dominated by the Big Five that bring the gain share model to the table.

Studies show that there is huge opportunity in India with a number of customers opting for PO to save hundreds of millions of dollars in process costs. The other advantage of direct outsourcing is that it will promote Low Cost Country Sourcing advantages, thereby boosting the Indian Manufacturing and Export industry significantly.

The future of PO

The future of Procurement Outsourcing in India is tightly coupled with the global trends within the segment. Throwing light on the segment it states the following:

  • Global Procurement Outsourcing suppliers are to utilize their India-based centers to absorb most of the transactional procurement work
  • With the strong base infrastructure for BPO in India, it is also an emerging destination for tactical sourcing and spend analytics
  • Managing and hosting of complete procurement solutions is yet another big opportunity.

Analysts also believe that PO would derive the labor arbitrage advantage, but also gain access to a host of specialized manpower skills.

Now Indian ITES-BPO companies need to concentrate on the following areas to establish a strong PO base in the country,

  • Partnerships with Category experts and sourcing managers in India
  • Indian universities that offer a procurement focused curriculum
  • A network of alliances in tools and technologies
  • Partnerships with aggregators
  • Mature outsourcing methodologies and ability to use offshoring capabilities for cataloging, contract administration and procurement HelpDesk

On conclusion, the trends and industry research point to a rapid growth Procurement Outsourcing industry over the next decade. One can expect tremendous growth in this sector than the Indian outsourcing industry of earlier years. The service providers and our Government policies have to gear up to offer the best for this upcoming segment and make a convincing case for the PO benefits.

References




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