In recent times, misunderstandings about why, when and what to outsource have increased in the procurement outsourcing (PO) space, creating gaps between customer expectations and actual outcomes. While the success of outsourcing initiatives is partly driven by a service provider’s performance, Genpact’s long experience with enabling effective sourcing and procurement functions has taught us that the absence of a clear procurement strategy and unrealistic customer expectations can also adversely impact business outcomes. Our insights into seven common myths help enterprises achieve better business outcome by applying proven best practices that set correct expectations and bring about increased success in procurement outsourcing initiatives.
Myth 1: The majority of savings are from labor arbitrage
Labor arbitrage does contribute to savings from consolidation, scale and efficiencies, but that is just the tip of the iceberg. The greater benefit of PO comes from driving spend reduction through a combination of supply market intelligence, deep category expertise on a foundation of process excellence. PO service providers also help customers by driving significant cost-out in tail-end spending, which is largely unmanaged due to inadequate staff resources. Additionally, service providers can drive greater global effectiveness at lower cost by consolidating and standardizing processes, unlocking opportunities for scalability. These smart processes result in capacity creation that aids in the redeployment of valuable customer resources for strategic initiatives, thereby increasing the overall value of sourcing.
Myth 2: Procurement outsourcing delivers savings by price reductions alone
Price reductions achieved by negotiating with suppliers do contribute significantly to savings. However, “non-price levers” also contribute to reducing costs. Non-price levers are based on repeatable and compliant processes and metrics that reflect performance across the entire source-to-pay process. Smarter, more connected end-to-end processes enhance adherence to compliance guidelines, while effective demand management and rationalization of specifications across an organization help lower costs. Conversely, non-compliance to contracts, using non-preferred suppliers and not ordering from catalogs can result in contracted savings losses as high as 30-40%.
Myth 3: Direct procurement functions cannot be outsourced
While functions such as vendor development and vendor relationship management may need to stay with the customer organization, a considerable number of direct procurement support activities have been successfully decoupled and outsourced. Functions including demand planning and forecasting, spend analytics, commodity price tracking and transactional purchasing have all been intelligently outsourced over the years.
Myth 4: Procurement outsourcing results in a loss of control in strategy and processes
In most successful PO engagements, procurement vendors are well integrated and act as virtual extensions of a customer’s procurement functions, from the adoption of strategic goals to the operational culture. The customer, therefore, continues to exercise full control over all aspects of the procurement function with the vendor. Key steps in reinforcing “positive control” by customers in an outsourcing engagement are:
- Careful identification of sub-processes and categories to be outsourced and retained
- Robust transition project management, effective governance and change management
- Appropriate service levels and metrics linked to business outcomes
Myth 5: New technology platforms are essential to success
Depending on the process maturity of the procurement function, augmenting existing technology with incremental software changes obviates the need for a completely new platform.
Typically, customers have already implemented ERP platforms, which may have sub-optimal utilization rates. While certain sub-processes, such as contract workflow or eRFX, may require new tools to drive compliance and effectively increase spend management, they do not necessarily require expensive system implementations. A number of cost-effective Software-as-a-Service (SaaS) products are available for adoption during transition.
Myth 6: It’s all about outsourcing low-end transactional activities
The PO landscape is shifting away from the transactional “Accounts Payable” to a more strategic focus on a “Source-to-Pay” framework. While PO began as a low-end transactional activity, high value work such as spend analytics, sourcing, contract lifecycle management and vendor relationship management is now being transitioned in more mature outsourcing relationships. One hallmark of a more intelligent organization is its ability to take a holistic view across the enterprise and break down silos that impede effectiveness and lead to revenue leakage. Thus, forward-looking companies are deploying PO vendors for sourcing and transactional procurement together in order to derive the benefits of end-to-end process integration.
Myth 7: Internal stakeholder satisfaction and supplier relationships are adversely impacted
Agility in response to stakeholder concerns and the ability to connect individuals, departments, and business units to quickly resolve issues is an important differentiator between effective procurement organizations and lower-performing competitors. Most mature procurement relationships incorporate governance structures that effectively mitigate dissatisfaction with internal stakeholders and suppliers. Customer organizations use transparent frameworks such as a “Procurement Helpdesk” with an escalation mechanism to resolve issues with the outsourced procurement organization. This anticipates and resolves potential conflicts. Additionally, customer procurement organizations can monitor stakeholder satisfaction metrics and ensure quick intervention when issues are escalated.
Procurement outsourcing already delivers significant value to customers; however, its true potential has yet to be fully exploited. This is partly due to common misconceptions and misunderstandings, including those outlined here. To achieve the highest possible business impact and a more intelligent, agile, and effective procurement function, companies and their partner organizations should work together to resolve these issues and close the gap between expectations and final outcomes.
For more information, contact, firstname.lastname@example.org and visit, genpact.com/what-we-do/business-services/direct-procurement