Conventional wisdom says that the bulk of savings from procurement outsourcing (PO) comes from labor arbitrage. It doesn’t. Conventional wisdom also tells us that outsourcing is only suited to low-end transactional activities. It’s not. Nor, as many organizations believe, will you have to upgrade all your current systems to make it work.
Surprised? We’re not. In our experience, many companies evaluating outsourcing models are unknowingly operating inside an unseen trap based on misconceptions that could prevent you reaching your efficiency and revenue goals for the engagement. Seven common myths can have a large and unexpected negative impact on business outcomes:
Myth 1: The Majority of Savings Are From Labor Arbitrage
While many organizations believe labor arbitrage returns the biggest savings from PO, in fact the greatest cost benefits come from supply market intelligence and deep category expertise built on process excellence. The provider’s expertise in overlooked areas such as optimizing tail-end spend also adds value on top of the savings derived from more effective global processes.
Myth 2: Procurement Outsourcing Delivers Savings by Price Reductions Alone
Price reduction achieved by supplier negotiations can contribute to significant cost savings. However, “non-price levers” such as demand management , specification optimization and compliance management of smarter processes drive performance across the source-to-pay process, producing better compliance, more effective demand management, and saving losses as high as 30-40%.
Myth 3: Direct Procurement Functions Cannot Be Outsourced
While some functions such as vendor development and relationship management may need to be retained within the client organization, many others have been successfully outsourced to experienced partners. These include demand planning and forecasting, spend analytics, commodity price tracking and transactional purchasing.
Myth 4: Procurement Outsourcing Results in a Loss of Control in Strategy and Processes
Successful procurement vendors act as a virtual extension of the client’s procurement function. The client retains full control of all functions through careful identification of activities to be outsourced or retained, robust governance and change management processes, and implementation of performance metrics linked to business outcomes.
Myth 5: New Technology Platforms are Essential to Success
Innovative use of smarter technologies allows companies to achieve high performance without high-dollar investments. Selected workflow tools and deployment of Software-as-a-Service solutions that work with legacy systems can quickly increase compliance and spend management at minimal cost.
Myth 6: It’s All About Outsourcing Low-End Transactional Activities
Breaking down silos that impede effectiveness and lead to revenue leakage is a key differentiator of best-in-class PO. The most successful engagements have moved beyond transactional activities to include high-value functions such as sourcing, contract lifecycle management, and vendor relationship management to achieve the full benefits of end-to-end process integration.
Myth 7: Internal Stakeholder Satisfaction and Supplier Relationships are Adversely Impacted
Most mature procurement relationships use transparent governance structures to effectively mitigate dissatisfaction with internal stakeholders and suppliers. Procurement helpdesks with built-in escalation mechanisms can anticipate and quickly resolve disputes as well as continuously monitor client satisfaction metrics.
You will find detailed insight into these seven common myths, drawn from Genpact’s years of experience in procurement outsourcing, in our white paper, “Tips for the Intelligent Enterprise: Seven Procurement Outsourcing Myths, Demystified” to help you drive a more “intelligent” and successful engagement.
Download the entire white paper to learn how these myths can prevent a PO engagement from achieving its full potential.