Where is value in procurement outsourcing?
Organizations seeking to improve corporate performance often look to Busines Process Outsourcing (BPO) services to streamline business processes and improve operational performance. Procurement is not immune from this pressure and outsourcing is becoming more accepted as a viable strategy for procurement performance improvement.
Procurement outsoucing can either be full or incremental. Full procurement entails leveraging an outsourcing provider to manage all processes and categories of source to pay cycle.
Incremental outsourcing involves utilizing an outsourcing provider to manage either distinct and categories across source to pay cycle. The outsourced processes could include spend analysis, sourcing, supplier information management, category management, catalog management, procurement transaction management, contract management.
Some of the benefits of procurement outsourcing include improved pricing, lower procurement costs, headcount reduction, market and supplier intelligence and improved spend visibility.
Where is the value?
The value levers available to strategic buyers fall into four main categories.
Volume aggregation. By bundling demands from multiple clients, outsourcing providers can often negotiate better prices, especially in areas where the company’s own spend is too small or infrequent to give it a strong position in the market. To capture the benefits of volume aggregation, however, companies must be sure that their own specifications and delivery requirements are sufficiently similar to those of the outsourcing provider’s other clients, and that they are willing to accept the provider’s sourcing decisions, such as in moving to lower cost suppliers.
Expertise. Their scale allows outsourcing providers to offer deep expertise and real-time market insights across a broad range of categories. Access to leading expertise doesn’t just provide direct benefits in categories where companies don’t have their own expertise. It can also help them to “learn from the best” and improve their own capabilities in other categories.
Labor arbitrage. Outsourcing providers offer a combination of scale, standardized processes and low-cost locations designed to reduce the labor cost of sourcing activities. While labor arbitrage often delivers significant benefits in transactional sourcing activities, however, the nature of strategic buying can limit the savings achieved.
Demand and specification management. In the most successful purchasing organizations, 40 to 50 percent of the total savings achieved come from changes in internal factors, like optimizing specifications to minimize total cost of ownership or controlling demand. Such savings also tend to be the most sustainable over the long term.
Leverage on Technology: - Look out for procurement service provider who comes with a robust e-Procurement solution that will be at your disposal for all your source-to-pay needs. Your organization benefits from operational efficiency and organized data needed for spend analysis. This a sure bet!
Should you outsource?
There are common tell-tale signs within your operations that should prompt you to think of outsourcing a procurement processes in your organization. If any of this sound familiar, then you need to outsource Procurement processes
“With recent minimum wage increases, I need to find better ways to control my costs and to stay profitable while still delivering the highest level of service to my customers.”
“I get stomach ache every time there is a tender to float; I even spend more time in the toilet when it is time to evaluate”
“We are too small and can’t afford to hire a full-time procurement person.
“I see payments and purchase orders for new suppliers every week”
“We are busy and just don’t have the time to focus on procurement.”
“We hope for good prices, but we usually just accept what suppliers offer. We are leaving hard earned money on the table.”
“Contracts are stored in someone’s drawer or lost, never to be seen again. Contracts often expire leaving us scrambling.”
“Supplier relationships are too close. They don’t deliver on their promises. Communication is lacking or too casual.”
If any of these statements resonate with you, please keep reading.
Large companies, out of necessity, became more sophisticated and implemented Strategic Sourcing and Category Management, delivering substantial savings to their companies bottom line and even help capture innovation. This is a sure sign of the growing level of understanding and sophistication of procurement.
But where does this leave smaller companies that can’t afford a dedicated procurement resource, let alone an army of Strategic Sourcing professionals? Companies that have 50-1000 employees are putting most of their resources into driving innovation, customer facing and revenue generating endeavours.
Often small and medium companies must leave the purchasing to a functional group or a person in IT or Finance, reacting when a need arises. Perhaps there is not enough volume of purchasing activity to justify hiring a full-time or even a contract resource, or if there is, and they can afford to do so, they will hire someone full-time who is very junior, fits their budget and too often lacks the skills and experience to drive savings and strategic value for the organization.
Many avoid doing RFP’s due to lack of knowledge and fear of a perceived complicated and long process. Still others simply don’t know the value and savings a strong procurement process can bring to all companies.
So, what can these small and medium sized business’s do without breaking the budget? There is a new solution that offers, procurement as a service or virtual procurement services, better still, procurement outsourcing that will help these companies.
As the term would suggest, the services are delivered virtually by highly skilled and experienced procurement professionals, meaning, there is no need for dedicated, full-time people, on-site at your company’s location.
No need to dedicate space, equipment or pay a full-time salary or other benefits. Further, the services are project based with a targeted return on investment (ROI). It can involve a simple contract renegotiation, a renewal to achieve more favourable terms and pricing, a competitive bid to several possible suppliers to achieve the best overall solution considering quality and cost or even a full end to end project including project management for implementation of a solution.
Savings, or the return that can be seen are between 3-5% of the spend. Our service more than pays for itself. That means you can expect to not only cover the cost of the services, you will likely see savings delivered that are double to ten times that which you would have to pay for the services to start with. Not a bad return on investment.
The deal becomes more juicy when we come with a complete e-procurement suit at our cost.
Virtual Procurement services affords business’s access to the same benefits and sophistication a large enterprise enjoys; skilled and experienced procurement professionals employing a strategic approach to procurement including assessing and analyzing spend, identifying savings opportunities, managing the competitive and negotiations process, delivering market competitive pricing to drive bottom line savings.
So why should you care? You are already getting the best prices, right? You have all the time in the world to negotiate with suppliers. You have all your contracts stored electronically and know exactly where they are and when they renew.
Hmm. Not so sure? Would you like to have a Procurement professional assess and benchmark your expenses and confirm you are getting the best prices, or identify potential savings?
When top line (sales) stagnate, it is important to focus on bottom line.
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