May 23, 2024

Procurement Outsourcing: A Growing Trend Among Organizations

It involves the strategic acquisition of resources required by an organization to produce goods and provide services. With rising complexity and volume of procurement needs, more and more organizations are now outsourcing some or entire procurement functions to specialized third-party service providers.

Emergence of Procurement Outsourcing

Procurement outsourcing emerged as an option in the late 1990s when companies started realizing that they could focus on their core competencies by outsourcing non-core functions like procurement to experts. The initial drivers for outsourcing procurement were cost reduction through economies of scale and access to specialist expertise. Procurement outsourcing providers could leverage their scale and experience to deliver procurement services at a lower overall cost than in-house teams. They also brought deep specialized expertise and best practices that organizations lacked due to non-core nature of procurement.

Benefits of Strategic Sourcing

Over time, strategic sourcing emerged as an important driver for procurement outsourcing. Strategic sourcing involves advanced techniques like spend analysis, supplier negotiation and relationship management to optimize procurement spend. When done right, strategic sourcing can deliver significant cost savings through negotiating better prices and terms with suppliers. It also leads to improved supply chain efficiency, risk management and compliance. Outsourcing providers have dedicated resources, advanced tools and global supplier networks to deliver strategic sourcing much more effectively than most in-house procurement teams.

Focus on Core Business

By outsourcing procurement, organizations are able to focus internal resources on more strategic functions aligned to their core business and growth areas. When procurement is outsourced, in-house teams don’t have to spend time on transactional tasks like purchasing, supplier evaluation and contract management. They can rather dedicate more time on value-added tasks like demand forecasting, new product development and customer experience management. This enables organizations to stay agile and innovative by concentrating on areas that directly drive revenues and competitive differentiation.

Risk Management and Compliance

Compliance is a growing challenge area for procurement given the multitude of trade policies, sustainability regulations and labor laws. Outsourcing providers have legal and compliance experts constantly monitoring changes to ensure all supplier transactions adhere to the latest requirements. They also have robust governance frameworks and controls in audit-ready processes. This provides organizations assurance that their extended supply chain meets increasingly stringent compliance and ESG standards. Outsourcing also helps mitigate risks arising from areas like supplier financial distress or geo-political issues through the provider’s scale, alternative supplier options and business continuity plans.

Changing Models of Procurement Outsourcing

Initially, organizations preferred full outsourcing models where the third party handled end-to-end procurement operations and the client had little involvement. However, views have evolved since and more flexible, partnership-based models are gaining favor now. In these models, providers work closely with client teams to understand nuances, jointly develop strategy and periodically assess performance instead of only transactional handling. Client expectations have also matured from initial cost reduction to a broader strategic partnership that enhances capability, generates value and aligns to business objectives.

Functions Outsourced

Common procurement functions outsourced include transactional purchase-to-pay processes, supplier sourcing and contracting, spend analysis, supplier relationship management and category management. Increasingly, organizations are also outsourcing more strategic advisory functions like procurement transformation consulting. Multiple component procurement functions or a particular commodity category are outsourced too based on unique organizational needs, capabilities and objectives. The extent of outsourcing can range from select components to 80-90% of the total procurement spend.

Emerging Technologies

Technology is a key driver of changes in procurement outsourcing models and impacting how services are delivered. Advancements in areas like artificial intelligence, robotic process automation, blockchain and analytics are enhancing strategic capabilities, automating processes and improving visibility, control and collaboration. Leveraging these emerging technologies, providers are delivering services like enhanced spend analysis, risk-based supplier evaluation, demand forecasting, dynamic contract management and digital procurement marketplaces.

Choosing the Right Partner

With numerous options available, selecting the right procurement outsourcing partner is critical. Key factors to consider include service portfolio fit, domain expertise, track record of success stories, financial stability, technology capabilities, relationship management approach, cultural fit and transition management expertise. A comprehensive RFP and diligent supplier selection process assessing these attributes helps organizations find the best strategic partner to maximize benefits from their procurement outsourcing investments.

Procurement outsourcing is evolving as a strategic management approach adopted by leading organizations globally to gain efficiencies, optimize operations and enhance procurement’s contribution to business outcomes. With the array of benefits on offer and providers developing advanced technology-enabled capabilities, more organizations will likely outsource various elements of their procurement functions to achieve competitive advantages in the coming years. Proper partner selection and governance framework remains essential to successfully unlock value through the outsourcing engagement.

Note:
1. Source: Coherent Market Insights, Public sources, Desk research
2. We have leveraged AI tools to mine information and compile it