Procurement outsourcing predicted to grow

December 19, 2008
by Purchasingb2b staff

Dallas—Procurement outsourcing (PO) is expected to grow by more than 30 per cent in 2009, according to Everest Research Institute. North America and the UK will continue to be the biggest buyers of outsourced services, though Continental Europe and Asia Pacific will see growing interest as well.

Manufacturing continues to be the biggest PO buyer, but consumer products and financial services are also emerging as leaders. The research firm found the following additional trends:

• The profit and loss impact of procurement outsourcing can be five times that of other business process outsourcing;

• Suppliers typically charge fees of one to two per cent of the spend under management;

•Challenges to PO include the complexity of developing a spend baseline, establishing and enforcing savings targets, supplier metrics, and a lack of case studies to achieve business plan certainty. The vendor has challenges around finding category experts and staff with negotiation, communication and functional skills—a process that can take four to six months;

• Procurement isn’t often labour intensive, so wage arbitrage, in traditional PO contracts, has not been a big selling point. Newer contracts, however, are focusing on offshoring, to realize wage cost savings;

• Suppliers are divided into four sets: global multi-tower companies (Accenture, Capgemini, IBM, HP); full-scope players (Ariba, ICG Commerce, Xchanging); PO specialists (buyingTeam, DSSI, Newline Noosh, Provade); and offshore players (GenPact, Infosys BPO, Satyam, TCS, WiPro);

• The market is still highly-concentrated, with the top five suppliers: Accenture, IBM, Ariba, ICG Commerce and Xchanging controlling 75 per cent of market share;

• With more suppliers preferring smaller-scope contracts, the market is seeing the onset of a “phased” approach to procurement outsourcing, as opposed to the traditional “big bang;”

• Suppliers are preferring to overhaul their customer’s existing technology systems, as procurement ERP penetration continues to be low;

• Suppliers will build internal centres of excellence to groom internal sourcing experts and improve the scalability of their offerings;

According to Everest, PO is defined as outsourcing three or more procurement activities, and includes contracts with a managed spend of $50 million or more with a minimum time frame of three years.