Procurement OutsourcingNavigating the risks to reap the rewardsProcurement outsourcing has long been expected to become “the nextbig thing” in outsourcing. As far back as 1999, in A.T. Kearney’sAssessment of Excellence in Procurement study, executives said theyexpected to increase their outsourcing of day-to-day procurement activ-ities significantly, and deploy more strategically managed consortia.Yet more than a decade later, procurement outsourcing continues totrail outsourcing in other functions. Why aren’t more companies out-sourcing procurement? Because it’s not that easy to do.Procurement is not as easily outsourced procurement outsourcing will achieve Procurement isas other functions—that’s because pro- high growth over the next several yearscurement results tie directly into the may need to be tamped down. Figure not as easily out-cost of goods sold (COGS) and the 2 on the following page highlights thebusiness’s profit-and-loss statements. expected growth rates to 2012. sourced as manyCompanies are careful not to lose their In fact, a few companies recentlygrip on this important function. began the process of backing out of or other transactionalDespite a substantial growth in out- renegotiating procurement outsourc-sourcing in the past several years, ing deals they signed just a few years or non-strategicprocurement outsourcing is less than ago. One large multinational retailer2 percent of all outsourcing activities. that considered all indirect sourcing functions — that’sFigure 1 on the following page illus- categories to be “nonstrategic” under-trates the gap between procurement took a sizeable outsourcing deal that because it tiesoutsourcing projections and the reality did not result in ample benefits in sev-three years later among leading practi- eral categories. Another global telecom- directly into ationers, according to a comparison of munications company that “mixed”A.T. Kearney indirect procurement procurement into a broad outsourcing company’s profit-studies (2007-2010). contract concluded that it was paying Only a handful of companies are too much for average results. Both and-loss statements.considered experts at outsourcing pro- companies now recognize that theircurement and, to date, most procure- due diligence efforts during the vendorment outsourcing is limited to select selection and contracting processesportions of indirect spend. It is difficult were less than adequate.to envision it expanding to all indirect These experiences exemplify whyspend areas across companies, let alone companies planning to begin procure-into direct spend. Expectations that ment outsourcing efforts, or intensify
FIGURE 1: Level of procurement outsourcing lags expectationsOutsourcing activities — actual versus expected(% of respondents) 40 2007 actual 2010 actual 32 Expected in 2010 Expected in 2012-2014 23 19 14 12 10 10 4% instead of 30% 6 5 6 Unchanged instead of 17% 1 4% instead of 11% Strategic Tactical Operational Strategic Tactical Operational 2007 survey 2010 surveySource: A.T. Kearney Indirect Procurement studies, comparision 2007 and 2010FIGURE 2: Procurement outsourcing is expected to remain a small portion of overall outsourcingOutsourcing growth rates — 2007-2012 (% by business function) Revenue breakdown ($ billion) 27.9 4.8% 100% = 141 170 Human resources1 Finance & accounting 1% 2% 15.1% Customer care Procurement 16% 18% 22.3 6.9% 39% 36% 3.6% 12.4 12.0 11.7 10.5 10.3 10.6 9.6 8.4 7.1 7.4 6.6 6.5 5.6 5.2 5.2 44% 44% 4.8% 4.5 4.6 4.5 3.3 0.9 -1.9 -9.8 2007 2008 2009 2010 2011 2012 2007 2012 estimated estimated estimatedIncludes HR processing1Source: IDC “Worldwide and U.S. Business Process Outsourcing Services 2010-2014 Forecast”; A.T. Kearney analysisalready started initiatives, should do bly proficient in procurement before processes or sourcing categories andso cautiously. There are certain char- outsourcing it. Others are succeed- expanding only if these “pilot” effortsacteristics that leaders in procure- ing by starting with requests for succeed. This latter approach reflectsment outsourcing share. For example, proposals (RFPs) that are smaller in the type of caution that is warrantedthe most successful companies in pro- scope and more specific; encompassing when outsourcing any key corporatecurement outsourcing were not nota- a relative handful of procurement function.
Outsourcing Procurement: incremental outsourcing. A combined widely in this relatively immature out-What You Need To Know end-to-end category solution allows for sourcing field. While today’s customerA thorough analysis is a must when maximum savings potential from a service leader can engage a call centerconsidering procurement outsourc- non-core business area and encourages vendor and feel secure about the out-ing. You must be honest about your vendors to “put some skin in the game” come, the same cannot yet be saidcurrent capabilities when determining by committing to specific savings tar- about the procurement leader who iswhat facets of procurement you might gets. Of course, agreeing to this model considering outsourcing strategic sourc-outsource. For instance, do you out- requires ceding control over decisions ing or category management. Eachsource strategic sourcing? Category service provider’s specific capabilities,management? All procurement opera- solutions and service offerings are dif-tions from buying through payments? ferent (and, in some cases, still under Strategic sourcing or category development), as is the category-specificmanagement should not be outsourced Procurement know-how each possesses. Most impor-in isolation, in most cases. Yes, an outsourcing is an tantly, a full understanding of theexternal provider can perform strategic value proposition in terms of costssourcing alone to cut costs quickly emerging practice, weighed against potential savings andwith minimal transformation or change other benefits is needed. and certainly is notmanagement. But the benefits will be Determining which aspects ofshort lived unless you subsequently an arrangement procurement to outsource and whichdevelop a sound category management vendor solution to adopt are thecapability. This process will help to be entered basic first steps toward successfulacquire skills and know-how that were into lightly. procurement outsourcing. Yet the ulti-not already available and build disci- mate success or failure of such a dealpline in the procure-to-pay chain. But can very well lie in the contractingdoing so requires substantial change process. At this time, there are toomanagement efforts that vendors are many ways to land a procurement out-challenged to drive, especially when in the selected categories, combined sourcing contract, and the variety ofthey are not in control of the purchas- with significant change management options are actually a negative. Youing operations. Outsourced category and collaboration to realize savings. need to have a very clear picture of themanagement brings fees for service Clearly, if you are considering fees that you will pay for the servicethat can exceed the cost of bringing procurement outsourcing you must and the benefits you should expect inthis expertise in-house, especially where be open to change, and willing to let exchange.there is scale to leverage. the outsourcing vendor be the driving When charging for services, ven- A preferred operating model force behind it in order to promote dors may charge a fee as percentage ofinvolves outsourcing some transactional long-term savings. You must also managed spend, charge a fixed priceprocurement operations as a first step, understand all potential costs—both per full-time equivalent (FTE), chargeor combining end-to-end solutions for upfront and ongoing—before engag- a percent of savings achieved or evenspecific categories. The former arrange- ing vendors. offer to negotiate a gain-sharing agree-ment helps to realize savings in labor ment. Deals built around percentage ofarbitrage and improve efficiency by Contract Cautiously managed spend bring clear costs andoutsourcing non-core activities, cou- Deciding to pursue procurement out- invoicing, but can result in high ongo-pled with data transparency that can sourcing also means undertaking a ing fees and the risk of operating lossesresult in further savings due to formal strategic sourcing process to if savings are not committed.improved spend management. It also select the right vendor, as vendor solu- Price per FTE deals, which weprovides a solid starting point for tions and contracting methods vary endorse for procure-to-pay outsourcing,
present a clear picture around costs Delivering Results: Procurement outsourcing is alsothat make them easy to audit. The Deal After Deal unique when compared to the manydownside of FTE deals is that when Procurement outsourcing is an emerg- other types of business process out-contracts include category manage- ing practice, and certainly is not an sourcing (BPO), as it does not comement, what is in fact a high-value- arrangement to be entered into lightly. with the baked-in guarantees thatadded service is treated like any other For several companies, it has not yielded vendors usually deliver in other func-type of transactional outsourcing, thus the expected results. Companies with tions. An early willingness to shareblurring the value of the spend man- the most to gain tend to be those with spend data and an honest assessment ofagement skills incurred, which actually annual revenues between $1 billion present-day capabilities is a mustgo beyond that FTE. and $5 billion, as they rarely invest during the vendor selection process. Contracts that include one-time heavily in procurement capabilities Where a capability is found to be lack-charges upfront typically result in neg- and are keenly focused on growth. ing, the question then is whether it canative cash flow in the first year or two Companies in this range lack the be improved through an internallyof the arrangement, but they are fairly scale to make significant headway by focused effort or by outsourcing.transparent and help to incur a real pooling their own spend across the The pilot approach discussed ear-cost in the right category rather business, but can outsource indirect lier offers a cautious on-ramp, with thethan realizing it later through high categories to a vendor that can in potential to expand efforts by addinglong-term fees. Although gain-sharing turn bundle this spend with that of more categories or moving up theagreements create the appearance of other companies to obtain favorable chain to more tactical aspects such asa partnership and potential upside, the terms. Consumer products and finan- strategic sourcing and category man-concept tends to be blurry in execu- cial services companies have been agement. As it happened with the nowtion. Because gain-sharing relies on leading the inquiries about procure- more popular outsourced functions, thetrust, disputes may arise around how ment outsourcing based on a com- best way to eliminate “buyer’s caution”much in savings were realized should bination of their familiarity with in procurement outsourcing is for athe signatories of these multiyear con- outsourcing other functions and their group of vendors to deliver sustainabletracts move on—thus, we rarely favor sizable (but often undermanaged) in- results and operational efficiencies—this type of arrangement. direct spend. and do so deal after deal.AuthorsChristine Ahn is a partner and heads the firm’s organization and transformation practice. Based in the San Francisco office, shecan be reached at email@example.com.Ricardo Ruiz-Huidobro is a partner in the firm’s operations practice. Based in the Washington, D.C., office, he can be reachedat firstname.lastname@example.org.Rodrigo Slelatt is a principal in the organization and transformation practice. Based in the New York office, he can be reachedat email@example.com. A.T. Kearney is a global management consulting firm that uses strategic insight, A.T. Kearney, Inc. 1 312 648 0111 tailored solutions and a collaborative working style to help clients achieve sustainable Marketing & Communications email: firstname.lastname@example.org results. Since 1926, we have been trusted advisors on CEO-agenda issues to the 222 West Adams Street www.atkearney.com world’s leading corporations across all major industries. A.T. Kearney’s offices are Chicago, Illinois 60606 U.S.A. located in major business centers in 37 countries. Copyright 2010, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. A.T. Kearney® is a registered markof A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. 10-10