Redefining procurement series: Procurement outsourcing (part 2) – why outsource procurement?
Oct 20, 2011 4:02:00 AM
Our previous post in the Redefining Procurement Series offered a brief overview of successful Procurement Outsourcing and how it differs from the traditional BPO we have grown to know. This post looks at the fundamental question of why outsource procurement at all?
Organisations with a clear definition of Direct Procurement (also referred to as Goods for Resale, Primary Procurement, Common Goods etc) have spent decades engineering their primary supply chain - ensuring:
- GFR margin is at or above industry standard
- Risk is kept to a minimum
- Long term supply has been assured with preferred suppliers
- Relationships have been built and developed over time
- Processes have been engrained into the core business
- Senior executives and Board members acknowledge the value of the supply chain in light of business objectives.
Indirect Procurement (also called Goods Not for Resale, Non-Core or Non Common Procurement or a term which is becoming increasing used - Enabling Spend), on the other hand, has slipped down a long list of senior executive's priorities as its strategic value at Board level is questioned.
A FTSE 100 beer brewer based in Europe, during a recent interview, advised that 90% of the procurement team's time is focused on the direct supply market with minimal attention given to indirects - with majority of this expenditure residing within the individual business units, dispersed across Europe, who have "no incentive to buy better when looking at their individual list of priorities"
This brings up the question, can't you apply all the experiences and learnings from Direct Procurement to Indirect expenditure?
The answer is simply, NO!
The difference between Direct and Indirect Procurement
(Click the image to enlarge)
As you can see from the above chart, there are fundamental differences in how this aspect of expenditure is managed:
- Within the indirect supply market there are hundreds of categories, all of which require deep knowledge to procure effectively. Also, there are tens of thousands of suppliers, all who invest heavily in selling to you (the buyer) - for large contracts it is not unusual for a supplier's account management team to be larger than the entire Procurement function it is selling to.
- Given the relatively high turnover of indirects, it's not uncommon to see large numbers of low £ value transactions being carried out, frequently
- There are thousands of stakeholders (internal and external), all with knowledge about their area but need Procurement's support. This is turn means that Procurement must act as an internal advisor, influencing functional decision makers and budget holders about their spend
- Indirect procurement professionals do not actually have any mandate over internal stakeholder's budgets.
Overall, managing Indirect expenditure effectively requires a huge variety of skillsets. Skillsets such as:
- A broad range of category expertise
- Change management
- Influencing, engaging and advising various stakeholders across the business (from senior executives down)
- Facilitation, negotiation and supplier management
- Data analysis (turning raw data into business insights and intelligence)
- Technological know-how - and so the list goes on
To make matters even more challenging, the demands on a business, and the skill sets required to effectively management indirects, change from one week to the next.
The odds therefore are heavily stacked against any procurement function looking to centralize and consolidate Indirects (in the same way as Directs) or in fact even being able to consistently meet an organisation's growing needs.
So what are your options?