Redefining procurement series: Procurement outsourcing (part 4) – the marketplace
Nov 3, 2011 9:01:00 AM
My previous post, in the Redefining Procurement Series, took a comparative look at the options available to business leaders for managing indirect expenditure more effectively - with outsourcing coming out as a very viable option. Today's post will quickly review the global procurement outsourcing marketplace.
Procurement outsourcing is still very much in its infancy when compared with Finance, HR and IT. It has really only been the last 5-10 years in which we have started to see the growing trend of global businesses looking to partner with a third party provider to manage their indirect (non-core/ GNFR) expenditure.
The Everest Group's Procurement Outsourcing Annual Report offers extensive insight into the procurement outsourcing marketplace. Some key findings from the report are:
Market Size and Growth
- 2010 was the best year ever for PO in terms of new contract signings (over 50) and contracts extensions (over 30)
- The PO market size in terms of active ACV reached US$1.3 billion in 2010. 2010 YoY growth was similar to that witnessed in 2009
- Service providers are managing over US$162 billion of non-core procurement spend on behalf of their clients
- While the U.S. continues to be at the forefront of PO adoption, Europe (including UK and Continental Europe) is fast catching up
- 35% of the contracts signed in 2010 (compared to nearly 25% in 2009) were global in nature
Size and Terms
- Despite improvements in the global economic conditions, buyers remained cautious in their approach - the number of small-sized contracts increased in 2010 - nearly 75% of the contracts have TCV less than US$15 million. The number of single-process contracts also increased in 2010
Market Breakdown (Players)
- Sourcing players: People led (labour arbitrage), focus on spend and contract management
- P2P players: Technology led, focus on automation and system integration
- End-to-End players (where we sit): Combination, focus on the entire S2P process integrating people and technology
While comparable number of deals have been signed in 2011, the TCV (for many of these deals) is much larger and the overall length of contracts longer. Mid-size to large organisations are trending away from pure technology driven arrangements (spurred from the need to become more cost efficient - doing the same task for less cost) and increasingly heading towards the full service offering (driven by the need to become leaner, more agile and more protective of profit margins).
Many senior executives have been cautious in their approach to outsourcing procurement capabilities - starting with single categories or spend areas and working out from there.
While the 'taste-test' approach enables senior executives to evaluate the efficacy of outsourcing a particular facet of their procurement, the results can vary drastically between categories. Given that the usual measure of success, for the initial phase of this 'taste-test', is savings delivered by the outsourcer compared against the inhouse teams results, focus is naturally placed on releasing cash quickly (encouraging the wrong behaviours from the offset of the partnership - which become harder and harder to deliver over the course of the partnership).
Complete outsourcing arrangements (which are longer term by nature and are increasing in number) ensure sustainable measures of success (and completely tailored solutions) are put in place which encompass risk, change management, SRM, compliance and savings - more representative of a collaborative partnership than the tactical 'taste-test' approach.
Overall the procurement outsourcing market place is seeing a spike in activity, assisted by the constant musings from trade and national press around the dire situation many businesses face in light of diminishing top line growth, an underperforming stock market, fluctuating commodity and currency prices and severely damaged consumer confidence. Many in-house teams are simply underinvested and inadequately equipped to effectively deliver an optimal service back to the various stakeholders in their business and, more often than not, need a solution to fill the voids in their team.