Top 10 Practices in Procurement Outsourcing

In the recent years, there has been a notable increase in the adoption of procurement outsourcing (PO) services by the companies across the world.  Last year, the outsourcing industry witnessed signing of more than 50 PO deals.

According to the latest report, multi-process outsourcing has also grown significantly to become $190 billion worth market.

Best practices for procurement outsourcing. Image source

As the PO market is maturing, more and more companies are considering outsourcing their procurement activities. In this context, Everest Group, the leading research firm has made an attempt to bring out the best practices in procurement outsourcing.  These best practices will help the buyer as well as the provider to understand the value that PO offers.

1. Greater focus on end-to-end S2P process

The new PO contract deals signed focus on end-to-end source-to-pay (S2P) process. The S2P process covers all the aspects of procurement activities unlike source-to-contract (S2C) and procure-to-pay (P2P) which focus only on few areas of procurement activities.

2. Involvement of CFOs in the PO process

Companies availing the services of procurement outsourcing are also involving CFO in order to ensure that the desired benefit of outsourcing is realized in terms of figures. Further, there is a strong relationship between accounting process and PO since significant value created by PO can be washed off by poor spending and working capital management. Hence, companies make it imperative to combine finance with PO process in the beginning itself.

3. Classification of expenses as core and non-core

Companies are adopting traditional method to classify procurement spending. They classify spends as core and non-core spends and outsource all categories that comes under non-core.

4. Building a long term relationship but adopting a phased approach to mitigate risk

Companies realize the importance of building a long term relationship with their outsourcing partner as well as the risk in outsourcing the entire procurement process all at a once. They are outsourcing only after initially until a trust and comfortable working relationship is built.

5. Cost reduction, compliance and operational efficiency are the three drivers of PO

Price reduction is achieved by outsourcing S2C process and realizing about 40-60 % of savings. Compliances drive another 30-50% savings. PO also leads to operational efficiency by reducing turn-around time, duplicate payments and improving working capital.

6. Building a win-win relationship

While outsourcing, pricing models of service provider matters a lot. The companies and PO partner try to choose multiple price models so that both the parties would taste the benefits. The most chosen pricing models are managed service fee (MFS) and gain sharing models.

7. Defining the roles and responsibilities of both the parties

While drafting the outsourcing contracts, the companies should define the roles and responsibilities of both the parties so as to avoid disputes in future. They should also define the behavior of the contract for all the stakeholders to understand.

8. Measure realized savings

This is a holistic approach to measure the real success of outsourcing. Measuring the savings achieved and improvement in operational efficiencies will give a picture of exact results delivered by the service partner.

9. Leveraging on global sourcing and technology

Companies can benefit by leveraging on global sourcing. There are many functions such as spend analysis, RFP analysis and demand analysis that can be outsourced to low cost offshore locations.

The companies should also keep in mind the technology capability of the service provider while outsourcing. This is because a provider investing in procurement technology can drive significant value addition to their procurement processes.

10. Effective change management

The success of any PO is dependent on the capability of buyer’s and service providers’ effective change management strategy. This requires a strong co-operation from the buyer’s top management and stakeholders.

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