Procurement Outsourcing is On the Rise

But is it the dawn of a transformational era?

Everest Global just released it’s Annual Report on Procurement Outsourcing, which it called the dawn of a transformational era, where it found that the procurement outsourcing market is growing at a rapid pace (12% year-over-year in 2014) but that it is in a state of flux with record new deal signings intertwined with high end-of-year terminations (26%), indicative of service provider switching (or, sometimes, the pulling of the function back in-house because not all outsourcing decisions outsourced the right functions). (However, 2 providers, Accenture and IBM, still command over half of the Annualized Contract Value and the next two largest providers, Xchanging and GEP, command about 17% of the ACV, which means that two thirds of the market is dominated by four providers.)

This, and other findings discussed below, was based on Everest Group’s database of over 1,100 Procurement Outsourcing contracts (each worth over 1M with managed spend typically in the 50M+ range), its database of operational capabilities of roughly 20 Procurement Outsourcing providers, and ongoing surveys and interactions.

There were seven key messages in this report, including the rapid 12% year-over-year growth, but the three we are going to focus on are:

  • The value proposition is transitioning from a cost-focussed model to a cost+value model, where strategic drivers such as market intelligence, supplier relationship management, and operational excellence are gaining more importance
  • The scope of contracts is expanding to a more end-to-end approach
  • The role of technology is growing, with increased adoption of end-to-end platform-based offerings

Advancement of the Value Proposition

In the beginning, outsourcing was mainly focussed on economics (cost reduction):

  • procure goods and services at the best prices
  • optimize activities to be cost efficient

More recently, outsourcing has been focussed on efficiency (cost avoidance):

  • spend consolidation to drive further impacts (with volume pricing)
  • satisfaction of complex demands
  • quality as well as price (to reduce warranty/return costs and protect the brand)

But now outsourcing is starting to focus on value generation:

  • the outsourcer is trying to become a strategic partner and not just a cost centre
  • the outsourcer is trying to define and drive business outcomes that impact overall growth
  • the outsourcer is trying to predict market trends to help organizations adapt to, and take advantage of, macroeconomic shifts early

How? Outsourcing is becoming more interested in identifying innovative suppliers, tracking and enforcing compliance and risk management, and gathering and harnessing the power of market intelligence.

Increasing Contract Scope

While many outsourcing contracts start out as Source-to-Contract (S2C), where the outsourcer helps the organization identify savings in indirect, non-strategic, or even strategic categories where the organization just does not have the volume, many are transitioning to Source-to-Pay (S2P) contracts where the provider also takes over the back-office invoice management and accounts payable function. Similarly, those contracts that started out as (P2P), because the organization thought its first priority was freeing up resources for strategic sourcing, are transitioning to S2P as well because these organizations realize that a third party can source those categories that it does not have expertise in better than the organization can.

More Prominent Technology

“Cloud”, Big Data, Digitization, and Consumerization is reshaping the Procurement Outsourcing marketplace as organizations demand more from their outsourcing providers and outsourcing providers look for an edge over their peers. With the proliferation of S2P SaaS solution offerings on the marketplace, outsourcing providers can not only offer S2P services but also enterprise S2P platform deployments where the customer organization not only gets platform access, but the ability to use the platform for their sourcing projects as well.

These are promising findings. Given that most Procurement departments are under-staffed and that no Procurement department can be an expert in every category and every technology, it’s good that there are maturing outsource providers that can add value to the organization and not just drain dollars.

And the other findings, which can be found in Everest Global’s just released Annual Report on Procurement Outsourcing, the dawn of a transformational era, are promising as well. It’s worth checking out.