Procurement Outsourcing I: Is it right for you?

Simply put, procurement outsourcing to a Procurement Services Provider (PSP) is the transfer of specified activities relating to sourcing and supplier management to a third party.

Why should you consider procurement outsourcing?

It is a well known fact that businesses that outsource (well) grow faster, larger, and more profitably then those who do not. When done right, this is especially true for procurement as it can generate additional value through sourcing and compliance savings as compared to the savings opportunities from most outsourcing arrangements, which are generally limited to efficiency improvements and headcount reductions. In addition, it is a transformational type of outsourcing where a portion of the savings generated from an initial endeavor can be used to finance and expand the transformation.

One reason to outsource would be if the procurement of certain categories, such as indirect or non-critical materials, or the management of certain procurement processes, such as requisitioning and compliance tracking, were not core competencies since outsourcing provides an opportunity to increase efficiency, lower costs, and increase savings. Outsourcing in these situations is often much more economical than trying to build the competence internally.

Another reason to outsource is to keep your top performers happy. A first class sourcing professional wants to focus on strategic core purchases where she can have the greatest impact, not tactical indirect categories where savings opportunities are limited and impact minimal. By transferring manual and tactical tasks and low-impact indirect categories and class-C commodities, you give your top performers more time to focus on what they do best and what benefits you the most. On the flipside, your low-volume non-strategic indirect categories become high-volume strategic niche categories in the hands of a PSP who can aggregate volume across clients to the point where niche professionals focused on that category can be hired and kept happy by the sheer volume of opportunities.

A final reason to outsource would be if procurement is an area that, if managed properly, could drive significant value to your business but it is not an area you plan on investing significantly in or increasing focus internally. In this case, you could consider full spend management outsourcing, but it is not something we would recommend unless you were in an industry where all goods and services procured on a regular basis were non-strategic indirect or commodities. A hotel chain would be one example of a firm where full spend management outsourcing might make sense as the vast majority of goods and services procured on a regular basis are commodities.

How does procurement outsourcing work?

There are essentially three basic levels to the outsourcing of procurement functions: infrastructure transfer, tactical process transfer, and strategic category transfer.

At a basic level, you are moving or augmenting staff, technology, systems, and supplier management to or with the PSP. At the next level, you are moving certain processes, such as requisitioning or procure-to-pay, that are easily automated and tactically oriented. At the highest level, you are transferring responsibility for entire categories and expecting the PSP to undertake strategic sourcing initiatives with respect to those categories.

At a basic level, the PSP will manage e-Procurement systems that automate and streamline manual purchasing processes and transactions and provide you with improved spend visibility, compliance, and process efficiencies. At a higher level, where you transfer tactical processes and control of indirect or commodity categories, the PSP will support day-to-day activities in supplier management, order and pricing compliance management, and policy enforcement and provide you with improved services levels and reduced costs. At the highest level, where you transfer strategic categories or full spend management, the PSP will provide on-going end-to-end strategic management of these categories, implement strategic sourcing best-practices, and drive continuous process improvements that should eventually lead to significant cost savings, or cost avoidance if raw material prices are steadily increasing in your commodity categories.

What results can you expect to see?

The value associated with procurement outsourcing is extensive. In addition to the year-on-year cost savings documented by numerous studies, obtained by way of the PSPs in-depth market knowledge and volume aggregation capability, you maximize your return on your existing procurement capability by freeing up your professionals to focus on your most strategic categories. You reduce cycle times and increase the capabilities available to your users, but, most importantly, you provide your users with total indirect spend visibility as a PSP will be able to benchmark practices and prices and apply a standardized process to each category it manages.

In their 2004 Benchmark Study that surveyed 750 senior procurement, supply chain, and CFO professionals, Aberdeen found that enterprises outsourcing procurement recognized rapid and measurable reductions in cost structures, improved spend leverage and control, and operational efficiencies. In particular, they found that, even in the early stages of procurement outsourcing, on average, companies could reduce prices paid for goods and services by 18%, improve contract compliance by 60%, halve sourcing and transaction cycles, reduce administration and automation costs by over 25%, and improve rebate and volume discount capture by up to 20%.

Aberdeen also found that 43% of enterprises already outsourced select procurement processes or spend categories and that an additional 15% planned to outsource procurement functions by 2007.

For more information on procurement outsourcing, see the Procurement Outsourcing: A Brief Introduction wiki-paper over on the e-Sourcing Wiki.

3 Responses to Procurement Outsourcing I: Is it right for you?

  1. Why outsource to Costa Rica?

    In today’s highly competitive outsourcing market, a closer proximity to the United States , Central Time Zone and Spanish language capability as an added value are now considered almost basic requirements when making a decision on what call center to use for your important project. Leaving this to chance is not even an option anymore.

    Many of the offshore call center agents are bilingual in their native Middle Eastern or Asian language which is difficult to the North American ear. Whereas Spanish is more useful and practical as a second language for potential untapped markets throughout the North, Central and South American populations as well as those countries where Spanish is either a primary or secondary language. This aspect alone has made Costa Rica a very attractive “near-shore” outsourcing solution.

    Most importantly, you can take advantage of the international tax laws granted to international companies that invest in Costa Rica and its local economy. The potential savings and benefits will make your outsourcing campaign a very wise business decision.

    In addition, unlike other traditional call centers, Costa Rica’s Call Center stays focused on managing no more than a hundred person call center, one outsourced or inbound customer oriented campaign at a time in order to properly control quality,performance and positive employee morale. Once capacity is reached at one of our call centers, another location will be created with the same structure and business plan in order to keep our call center results and expectations consistently higher than that of the competition.

    Call center software is as important to an outsourced campaign as telemarketing training. Both areas must be secure, reliable and willing to out perform the same competition that you are currently considering. Costa Rica has a very solid infrastructure ,stable democratic government, very competitive labor costs and a call center job pool that is especially attunded to the North American culture. Call center jobs are some of the top paying career opportunities in Costa Rica. This differs greatly from other countries that consider it as a starting position in a dead end company. Turnover at these other locations are five to ten times more than in Costa Rica.

    The high demand for call center services has provided our company with an abundance of respectable resumes of qualified telemarketers that want to work with and for you.

    We encourage you to visit one of our call centers on your next personal vacation or business trip to Central America’s paradise, Costa Rica. While you are here, we would recommend taking an extra day of your trip to visit breathtaking virgin beaches, play golf next to the ocean, try your luck at deep sea fishing, explore tropical jungles, climb a volcano or just relax in natural hot springs. Come and see for yourself why call center outsourcing in Costa Rica is a perfect solution for your growing company and a powerhouse in the BPO industry.

  2. Organizations believe that they have negotiated favorable discounts from suppliers, but dissatisfaction with the overall cost-effectiveness of their indirect procurement services persists since the level of centralization of indirect procurement remains low and they continue to lack visibility of spend across the enterprise.
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