Procurement outsourcing
We are seeing increased outsourcing of not just customer service and payroll, for example, but also of activities that more directly affect a company’s value generation process. And, indeed, procurement has now joined the outsourcing market. Before the step toward outsourcing procurement is taken, two core questions need to be answered:
What services are expected? Outsourcing partners offer companies the complete range of activities on the transaction side including ordering materials, comparing invoices with orders, paying suppliers, making optimum use of contracts and spot buying, administering (consignment) inventories, handling demand management, and looking after the standardization and administration of master data. Procurement even takes responsibility for strategic issues such as the definition of sourcing strategies and the implementation of cost optimization.
What material and service groups are suitable for contracting out to outsourcing partners? They specifically include materials and services used by a large number of companies across a wide range of industries. A classic example is operating materials and supplies. While there are numerous suppliers and dealers in this highly competitive market, procurement usually has little price leverage because of the small quantities involved. By bundling the volume for all of their clients, outsourcing partners are able to obtain significantly better terms from suppliers. And at the same time, process costs are optimized because multiple firms’ orders are dealt with simultaneously.
Outsourcing of the procurement function (or at least parts of it) is prepared and implemented in four steps:
The first step is to assess the feasibility of outsourcing, by identifying and comparing the internal costs for procurement personnel and additional process costs for the maintenance of data occurring outside of procurement with the costs of external providers. The internal potential should be based on historic figures, while the external potential is defined directly by the prospective supplier. The potential for minimizing the costs of procurement in each case should also be determined. Because of bundling effects and the corresponding significantly higher demand power, the external potential for savings is usually higher. Any outsourcing decision should require the approval of top management.
The next step is to define the outsourcing model. This includes the preparation of a service agreement with targets, roles, and responsibilities, and a description of the procurement process.
The procurement process is then given over to the external provider. The materials data, requirements, supplier information, and specifications for delivery are also handed over. During implementation, all contracts are newly concluded. For companies with several sites, implementation normally takes 12 to 18 months.
Ongoing control of the external provider then needs to be put in place. A mechanism needs to be created that allows performance to be continuously measured, and conflicts resolved, as quickly as possible.
By outsourcing procurement, a company is able to both take advantage of the lower prices and process costs arising from the much greater demand power of its outsourcing partner and minimize its business risk. In addition, outsourcing enables procurement to focus on strategic questions.
Besides clearly defining the distribution of functions between internal and external services, procurement outsourcing also clearly—and crucially—defines the scope of services to be performed by the external provider.