Global myths of procurement outsourcing - Myth 2: The ROI from procurement outsourcing is insufficient
Research by Horses for Sources from June 2012 identified that 29% of organizations have limited interest in outsourcing procurement due to the Return On Investment (ROI) being not compelling.
This one really surprises me. Procurement outsourcing typically generates a ROI in the first few years of 15-20x. If CFOs realized that by spending $1 dollar they could generate $15 to $20 of bottom line impact, you would say that was a good project to spend money on, right? Well, this is what’s happening every day when procurement is utilized as a strategic tool. Yet executives don’t realize the potential.
Compare that with the ROI achievable through business investments in HR, finance, IT, R&D, etc. You will find the ROI from procurement is much greater. And yet procurement typically gets deprioritized, in favor of other areas of investment. From a financial perspective, in other words, the business is mis prioritizing where it puts its money. We see it happen again and again; businesses demand much higher ROIs from procurement than any other area of the company.
I think the issue here is that procurement is failing to make its case as successfully as other functions. It is not ‘selling’ what it can do to senior executives.
So the myth is exactly that - a myth. The problem is, it’s widely held, and one that’s going to take time to dispel.
The truth: The ROI from procurement outsourcing is greater than most other investment decisions senior executives can make. Typically, it generates a ROI in the first few years of 15-20 times, and sometimes even more. Beyond then, when a cost base is reached - it’s about maximizing value for money and ensuring the cost base doesn’t drift back to its previous level.
In the next post I’ll cover the initial reaction some people have to the idea of outsourcing procurement - a fear that the very stakeholders procurement serves will get a worse service…
Click here to access the previous post: Myth 1 - ROI comes from cost reductions