Understanding strategic vs tactical procurement outsourcing
Research undertaken by Proxima & NelsonHall found that many procurement outsourcing engagements, when led by the CPO, are tactical in nature (single categories, short term, department focussed). Conversely, outsourcing engagements are far more strategic (longer term, business focussed) when the CFO or even CEO are involved.
In many organizations the procurement function is resource-constrained and under-invested in and, while personnel in the function are often well regarded by their colleagues, there is clearly room for improvement in terms of the overall management and control the function provides in support of the wider business goals.
However, few businesses are actively engaging with specialist third-party providers, with a small minority actually outsourcing indirect procurement, as a strategy to increase the focus on supporting the goals of the wider business whilst providing deep commercial insight and change management.
Our research shows that a significant minority (17%) of organizations today are using external service providers to support their work in indirect procurement. The tendency is to use external service providers for:
- Discrete specific services which support the sourcing and supplier management activities: these include support for supplier identification, catalogue management and spend analytics. As such, organizations are using external services providers for support in specific activities, rather than an end-to-end process outsource, or
- Transactional activities: around invoice processing and disembursements.
Spot purchasing, an area in which many organizations feel they lack strong capabilities, is less commonly outsourced. Many indirect procurement BPO engagements are tactical in nature. This is particularly the case when the outsourcing engagement is instigated by the procurement function itself (rather than by the Chief Financial Officer/Chief Executive Officer).
However, CPOs still tend to think of outsourcing indirect procurement activities as a tactical initiative. Just 25% express a belief that this outsourcing would likely lead to a significant increase in the effectiveness of the indirect procurement function within their organizations. Importantly, CFOs express a significantly higher degree of confidence than CPOs about the likelihood of outsourcing indirect procurement leading to major increases in effectiveness.
This caution by CPOs perhaps reflects a lack of awareness by many CPOs of the various forms that indirect procurement BPO can take, as well as a fear of loss of control and perceived influence. The fact that outsourcing could be used as a strategy to extend their ability to work more closely with the wider organization is not widely understood.
The below chart highlights the two polar ends of the procurement outsourcing spectrum – comparing tactically focused outsourcing engagements with strategic focused outsourcing engagements. There are of course exceptions to this simplified classification (with areas such as supplier performance management, savings measurement, supplier innovation initiatives, etc sitting in between the two sides), but most procurement BPO arrangements fall into one of these two camps. Procurement outsourcing as a tactical decision, is usually instigated from inside the procurement function and the activities tend to be geared towards a support service rather than a transformational service.
Procurement outsourcing, as a strategic decision, is an investment to save substantial sums of cash, impacting profitability. The outsourcing provider needs to bring to the table all the capabilities that can help the client to improve business performance, catalyse or impact big change programmes, realign cultural attitudes towards cost management and positively change spend behaviours. This type of arrangement is seldom (currently) instigated by the CPO, much more commonly by the CFO, COO or even CEO and it’s clearly a strategic move.
Why do CPOs often fail to look outside their department and take a wider, business perspective on outsourcing as a strategy? Is it something to do with past experiences? An issue with education of benefits and pitfalls? A misfit with company culture?
Register your details to access the complete Redefining Procurement Series including a 60 minute webinar, three research-led whitepapers and a series of thought pieces covering:
- Current perceptions of the indirect procurement function and its desired future role within the organization
- The business value that can be derived through better managed indirect procurement
- Why businesses struggle with delivering indirect procurement effectively
- The role of procurement outsourcing in enabling the indirect procurement function to take on a business partner role within the organisation.