Outsourcing enhances performance

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The number of companies that will outsource their procurement activities is expected to more than double over the next two years. And the development will occur across geographies, industries and all sizes of company. That is the verdict of the latest survey by Accenture, which says that nearly a quarter of organisations are already using third-party procurement service providers (PSPs) and that the figure will reach 47% by 2006.

However, it is likely that companies will undertake selective outsourcing – category by category or service by service – rather than put all of their procurement functions out to third-party organisations. It is likely that non-core processes would be outsourced first before the more strategic categories and processes.

More than 75% of respondents worldwide that took part in the survey – Executive Insights into the Growing Use of Procurement Outsourcing – were the most senior procurement executive in their company. Through the survey, Accenture wanted to identify procurement strategies; identify typical PSP customers; ascertain the benefits; and observe what typical experiences and lessons had been learned. Accenture says the fact that nearly half of all companies will outsource some or all of their procurement functions “is a major shift in purchasing policy from attitudes prevalent only a few years ago”.

The trend for outsourcing is strongest where indirect materials are involved with 43% of respondents expecting to use PSPs – a 23% rise over the current figure. For direct materials, the number of companies expecting to outsource is lower at 22%. According to Accenture, this is not surprising as indirect materials represent a low risk to the business outsourcing them and are well served by PSPs familiar with removing cost reductions from spend categories such as travel; office materials; and materials, resources and operations.

Cost reductions

More than 90% of companies currently outsource some part of their operation such as transport, distribution, IT (see Fig 1), a move that revolves around the improved management of physical assets. But outsourcing is less prevalent in less-asset intensive business processes such as human resources, product development and procurement, because of a scarcity of suppliers in this emerging sector.

According to the survey, most companies have not yet outsourced all of their procurement process. Equally, no outsourcing has occurred without other operations being outsourced.

The most commonly outsourced procurement processes are the hosting of e-sourcing and e-procurement followed by the outsourcing of the requisition-to-pay process (see Fig 2). The outsourcing of the supplier and negotiation processes was less common among respondents.

Reduced cost is one reason cited for outsourcing procurement functions, and giving firms the chance to focus more aggressively on the strategic spend categories retained in-house.

The early leaders adopting procurement outsourcing to PSPs are in the telecom and IT sector, financial and health services and the resource sector.

Highly competitive business landscape is one reason for the telecom and IT sectors adopting the outsourcing trend, while sectors such as construction and government bodies are slower to adopt such practices because of their more conservative nature.

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