Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 19 August 2006

The Procurement Service Provider (PSP) landscape can be confusing, with a host of providers coming from many different backgrounds. You have traditional business process outsourcing and IT outsourcing behemoths that have invested in procurement skills, recent startups with procurement outsourcing as their sole vision, and specialist firms that concentrate on a handful of related spend categories. The result is a cloudy map of skills and capabilities ranging from transaction focused providers specializing in automation, through category specialists to comprehensive procurement service providers.

Considering that value comes from selecting the right partner with the right skill set, expertise, and experience to match your needs, it is very important that you can properly evaluate your options and choose the provider that is right for you!

So how do you identify a good PSP?

A good PSP will have access to the latest web-based e-tools, use a center-led procurement model, be driven by operating metrics, and have tools and processes in place to closely monitor compliance. It will also have a significant number of sourcing and category experts on staff who are up to date on best practices, experienced in your industry sector(s), and engaged in regular training and knowledge sharing endeavors designed to ensure they maintain world-class status. It will be based in a robust purchasing facility with integrated process and co-located teams, already have a pre-existing supplier network and supplier intelligence in your categories, extensive change management and knowledge transfer capabilities, and the flexibility to change as your corporate goals change.

Furthermore, the PSP will have a number of referenceable long-term customer relationships where they have been providing comprehensive spend management services across a significant number of companies and categories with a track record of success across industries, a solid balance sheet, a growth plan, and a commitment to maintaining operational excellence in procurement. Procurement will be its primary, if not only, focus.

What should you outsource?

Procurement outsourcing normally generates the largest returns when applied to non-strategic indirect categories and direct commodities of limited strategic value. In addition, it generates the largest return when the PSP has enough volume to identify significant savings opportunities. Therefore, you need to select a PSP that will allow you to go beyond simply infrastructure transfer and process support. (However, you should remember caution and not to go too far with your outsourcing initiative, since strategic sourcing dictates that you manage strategic categories carefully.)

Indirect purchases are ideal for procurement outsourcing because they are typically transaction driven, not part of your core business, and so varied that they generate considerable process inefficiencies for your staff, especially when most of your information systems will be designed for your direct categories. Furthermore, due to the sheer number of categories and variations therein, most of your buyers will lack the time and means to apply best practices such as cost breakdowns and benchmarking to these categories. Thus, a PSP with the right skill sets could be invaluable.

For more information on procurement outsourcing, see the “Procurement Outsourcing: A Brief Introduction” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].