Buried in the mound of data presented by Mr. Jim Mikell in his presentation at the 5th International Symposium on Supply Chain Management was some convincing evidence that, when done right, procurement outsourcing really does work. Depending on the situation, a company without a world class sourcing organization can outsource to a procurement outsourcer with a world class sourcing team and save up to 15-20% in a properly structured and scoped multi-year deal. Considering that over sixty percent of procurement spend is typically addressable by outsourcing, this provides a compelling reason to think about it – at least with respect to the spend that you don’t have a good grip on. Furthermore, the savings from procurement outsourcing can be nearly five times those derived from outsourcing other business processes like finance and accounting and human resources.
Where does the savings come from? Strategic sourcing (40% to 60%), compliance (25% to 50%), and operating efficiency (10% to 15%). A qualified procurement outsourcer will have skilled buyers with deep category expertise, systems to create orders and match invoices and make sure all spend is on contract at the contracted rates, and be able to leverage their scale to operate more efficiently.
When done right, procurement outsourcing can do more than just save your organization dollars. According to Jim, it can also:
- address the resource shortage issues in your sourcing group
- improve control, visibility, and compliance for a broader range of spend
- improve personal and professional experience for procurement professionals
- enable focus on higher-value, “strategic” procurement
- address the fact that industry category expertise is low for most buyers as the right procurement outsourcer will have experts on staff
Furthermore, the procurement outsourcing marketplace is maturing and, according to Jim and the Everest Research Institute, entering the “emerging rapid growth” phase of market maturity. This is evidenced by the fact that there were close to 20 major procurement outsourcing contracts signed last year, whereas there were only 39 from 2000 through 2005, with even more projected for this year.
Jim also presented a disciplined roadmap to address the challenges involved in outsourcing, which is defined as follows:
- Define “savings”
- defining savings for complex categories
- unavoidable economic fluctuations
- differing stakeholder expectations
- Establish (Realistic) Savings Target
- high number of vendor relationships
- lack of spend visibility
- moving saving targets
- Measure Savings
- savings attributable to supplier’s efforts
- distinction between savings and avoidance
- investments required to measure savings
- Enforce Savings
- fragmented & decentralized spend
- areas of high maverick spend
- budgetary issues
- Manage Operational Costs
- upfront investments in systems
- higher ongoing staff
And remember it’s not “your mess for less”. If you don’t have a good grip on what you’re doing and what you need to get out of it, you can’t just throw it over the wall and expect a third party to be successful. You need good process and project management, and this might require making some up-front investment to clean your house up and get ready for the transition to someone who can take something that you’re doing well and make it something that, combined, you do great.