The document discusses procurement outsourcing and some of the challenges organizations face when outsourcing procurement functions. It notes that while procurement outsourcing is a growing market, it still only accounts for a small portion of overall global spend. Some common issues with procurement outsourcing include organizations having unrealistic expectations about what outsourcing will deliver in practice. There can also be differences in how the client organization and outsourcing provider perceive the value being delivered. Establishing clear metrics and baselines is important for accurately measuring the impact of outsourcing. A lack of fit between the client and provider in terms of culture, expertise or geographic scope can also undermine outsourcing relationships. For outsourcing to be successful, organizations need

1. INSIGHT PROCUREMENT OUTSOURCING:
A FIELD GUIDE
In association with

3. 3
Procurement Leaders
ACCORDING TO research by
analyst Everest Group, the global
procurement outsourcing market
managed $254bn (£149bn) of
outsourced spend last year, up
12% on 2012. Moreover, growth
is healthy: during 2014, for
instance, spend under
management is expected to total
between $270bn (£158bn) and
$275bn (£161bn).
And for procurement
outsourcing providers, all this
activity is clearly big business.
Annualised contract value
totalled $2bn (£1.2bn) in
2013, and should reach $2.2bn
(£1.3bn) in 2014.
But behind the bullish figures
lurks an awkward truth. Because,
for all the hoopla, spend managed
through procurement outsourcing
still adds up to a distinctly modest
proportion of overall global spend
– even when the spend under
consideration is restricted to the
large organisations that make
up the procurement outsourcing
marketplace.
Put another way – and more
starkly – for every organisation
that does see merit in using
the services of a procurement
outsourcing provider, many
more clearly do not. Simply put,
as the sales organisations
Specialist servicePROCUREMENT IS
constantly under
pressure to be
leaner and meaner,
even as it looks to
transform its capabilities to
increase its value proposition.
The only way teams can hope
to have a true impact on the
business is by honing their skills
around key areas and
understanding other facets
where outsourcing can provide
the answer.
Managing spend doesn’t end
at commodity management;
category teams have to extend
their influence, adding expertise,
supplier management and
careful process in order to
produce savings and capture
value.
Teams that are able to strike a
balance between external
capabilities and internal focusing
put themselves in a strong
position to be both cost-effective
and more stakeholder-oriented.
So, the question becomes:
how can we spot the opportunities
and how can we manage the
process to get the most from it?
Steve Hall
Editor, Procurement Leaders
© A Procurement Leaders publication
in association with GEP.
All rights reserved.
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Reproduction in whole or part of any
photograph, text or illustration without
written permission from the publisher
is prohibited. Due care is taken to
ensure that the content of this publication
is fully accurate, but the publisher and
printer cannot accept liability for errors and
omissions.
Published by: Sigaria Ltd,
Unit 5 Tun Yard, Peardon Street,
London, SW8 3HT, UK
INSIGHT
Outsourcing is a growth area but it accounts for a small
amount of overall global spend, writes Malcolm Wheatley
Æ
PROCUREMENT OUTSOURCING

4. 4
Procurement Leaders
PROCUREMENT OUTSOURCING
INSIGHT
of procurement outsourcing
providers readily acknowledge,
not every potential customer
sees value in procurement
outsourcing.
Needless to say, of course,
it wasn’t supposed to be like
this. From catering to security,
and facilities management to
accounting, organisations have
successfully outsourced many
other activities to specialist
providers, in the process saving
money, as well as gaining a
sharper focus on their core
competencies.
So why should procurement
outsourcing be different? It’s an
intriguing question. The good
news – as this paper will argue
– is that it needn’t in fact be
any different. Talk to those close
to the issue, and it’s clear that
many more organisations could
gain value from procurement
outsourcing than presently do so.
Less welcome, perhaps, will
be the news that to gain that
value, some organisations may
have to approach the issue of
procurement outsourcing from
a different standpoint than they
do now. And less welcome still
may be the discovery that, for
some organisations, procurement
outsourcing isn’t for them.
So how, then, to gain that
value? What must organisations,
and procurement outsourcing
providers, do to maximise the
potential that procurement
outsourcing offers?
The outsourcing proposition
To answer these questions, it’s
first of all necessary to step back
and examine exactly what it is
that procurement outsourcing
delivers. The starting point is for
organisations to consciously
separate their spend and sourcing
activity into two areas: what they
might want to retain in-house,
and what is potentially eligible for
procurement outsourcing.
The first area of spend
comprises categories where
the organisation’s own direct
involvement adds value, or
potential value. Typically,
these will be direct materials,
especially strategically important
direct materials.
Major spend categories, direct
or indirect, may make up another
such area of spend. So might
areas of spend where the pace
of technology advancement is
rapid, where it can be important
to stay close to the cutting edge
of innovation.
The second area of spend,
loosely speaking, comprises
everything else. Typically, it is
large areas of indirect spend,
non-strategic in nature, where
there is little to be gained
by staying close to either
suppliers or industry trends and
developments. Stationery, office
equipment, travel, services –
the list is long and, for many
organisations, comprises an
instantly recognisable headache.
The compelling logic of
procurement outsourcing is
that adopting it proves beneficial

5. 5
Procurement Leaders
for both areas of spend –
the spend categories being
retained in-house, in short, as
well as the spend categories
handed over to a procurement
outsourcing provider.
In terms of the spend
outsourced to the provider,
for instance, there are clear
labour arbitrage advantages
to procurement outsourcing,
says Tunir Chatterjee, VP
global business development
at procurement outsourcing
provider GEP. “There’s little logic
in retaining the execution aspect
of procurement in-house when it
might be possible to hand over
the work to a lower-cost offshore
environment,” he points out.
BUILDING THE BUSINESS CASE
Every successful value-adding
procurement outsourcing
engagement begins with one
particular ingredient, says Chetan
Rangaswamy, VP consulting at
GEP.
“You have to have a strong,
bold procurement leader,” he
insists. “It’s vital that there
is C-suite sponsorship – a
CPO, CFO or COO – who can
confidently stand in front of the
board, and say: This is where
we should be going, and here
is the business case for making
the move.
Make no mistake, he
stresses, the decision to move
to procurement outsourcing is
invariably a board-level decision:
the sums involved quickly add up
to one of an organisation’s largest
lines of expenditure, if not the
single biggest line of expenditure.
And with that C-suite
sponsorship in place, he
continues, any reputable
procurement outsourcing
provider will work alongside
that procurement leader to
jointly develop and present a
business case for procurement
outsourcing.
He suggests that
developing a business case
for a successful value-adding
procurement outsourcing
engagement involves more of a
two-way dialogue than might at
first be appreciated.
“It’s not about the level of
financial returns, per se, but
about identifying and presenting
a value proposition which uses
procurement outsourcing as
a lever for providing the board
with the means to get what it
wants from its procurement
organisation,” explains
Rangaswamy. “In other words,
it’s about using procurement
outsourcing as a lever to further
an agenda of, say, moving away
from transactionally-driven
purchasing to more of a strategic
category management approach,
or leveraging a procurement
outsourcing provider in order to
reduce market risk, or working
with suppliers and internal
customers to reduce lead times
or inventory levels.”
And these aren’t ‘bolt-on’
extras, but a core part of the
procurement outsourcing
proposition, says Rangaswamy.
“Value is maximised by having
a mixture of quantitative goals
and qualitative goals, and the
best business cases blend the
two together in a seamless
whole,” he sums up.
Whilst there’s the obvious
benefit that comes from
staffing more cheaply,
dedicated resources also create
opportunities in capturing and
managing spend.
Typically, too, the handover
to a procurement outsourcing
provider results in a number of
other potential benefits. As a
third party accessed only through
formal channels, the procurement
outsourcing provider is often in a
better position to limit maverick
spending, for example.
Spend visibility can improve,
thanks to a procurement
outsourcing provider’s more
granular spend data collection
and reporting systems. And,
from the point of view of the
organisation’s internal customers,
an improvement in customer
service is often reported.
Moreover, adds Chatterjee,
useful synergies are possible
when a procurement outsourcing
provider handles the same spend
category for more than one client.
When that occurs, he points out,
the procurement outsourcing
provider can build up better
category expertise and market
insight than a single organisation
can hope to acquire on its own.
At which point, he observes,
there is considerable merit in
organisations involving their
procurement outsourcing
providers in the sourcing Æ

6. 6
Procurement Leaders
PROCUREMENT OUTSOURCING
INSIGHT
process as well. Not only do
some of the same labour rate
arbitrage opportunities arise,
but the procurement outsourcing
provider can use its greater
category exposure and market
insights to drive savings beyond
those that the client organisation
might find attainable.
Meanwhile, unchained from
the transactional burden of
operating the P2P process across
all these non-strategic categories,
the client organisation is now free
to focus more intensively on the
remaining categories, pursuing
a more strategic agenda, and
driving further savings through
to the bottom line, as well
as identifying opportunities
for enhanced partnership,
innovation, and areas of mutual
co-operation.
In theory, the use of a
procurement outsourcing
provider can make excellent
sense, adding value, driving
down costs, and providing
opportunities for a procurement
organisation to focus its energies
on more strategically important
spend categories.
So why should the practice
of procurement outsourcing be
different to the theory? Talk to
those close to the issue, and
it’s not difficult to discover
why theory and practice might
diverge, in the process detracting
from the value of the procurement
outsourcing proposition.
One problem area cited
by experts is the gulf
between organisations’ initial
expectations, and the subsequent
reality that they experience.
Overenthusiastic client
organisations, it seems, enter
into procurement outsourcing
contracts with an incomplete
understanding of what the day-
to-day reality will be like.
Cost-oriented rationale
“Procurement outsourcing often
starts with a cost-oriented
rationale, but very quickly
the client organisation comes
to realise that there are
many other performance
dimensions, such as flexibility
and speed of response, that are
required for the successful
operation of a procurement
outsourcing contract,” notes Dr.
Carlos Mena, director of the
Centre for Strategic Procurement
and Supply at Cranfield
University School of
Management. “This then leads to
tensions, and very often
renegotiation with procurement
outsourcing provider.”
Different perceptions regarding
the value that procurement
outsourcing delivers is another
frequently experienced difficulty,
not just in terms of differences
in the view held by the client
organisation and the procurement
outsourcing provider, but also
internally within the client
organisation itself.
“Especially in large
organisations, a gulf can
arise between what the senior
leadership thinks procurement
outsourcing is delivering,
and how the organisation’s
procurement professionals
regard the same procurement
outsourcing contract,” observes
Matthew Bardell, vice president
for consulting at GEP.
“The result is instances where
a procurement outsourcing
contract is up and running, and
delivering on all its planned key
performance indicators (KPIs),
and yet the organisation’s
leadership isn’t convinced.”
The root cause of such a
divergence in views? Usually a
failure to establish a ‘baseline’
set of metrics and KPIs that will
accurately reflect the impact
made by a move to procurement
outsourcing, say insiders.
“Looking back, it can be
difficult for organisations to
describe, in a quantitative
sense, exactly how procurement
operated before the move to
procurement outsourcing if
there wasn’t a ‘baseline’ set of
metrics recorded as a starting
point,” says Terry Mackay, an
independent procurement and
supply chain consultant.
“The result is that there is
no clear recognition of how
much value the procurement
outsourcing provider has
delivered, and a consequent
difficulty when it comes to
management oversight of the
outsourcing contract.”
That said, points out GEP’s
Bardell, the challenge in
establishing such a baseline set
of metrics is that it requires the
client organisation to be clear
about its needs and requirements
before the commencement of
“The procurement outsourcing provider
can use its greater category exposure
and market insights to drive savings.”

7. 7
Procurement Leaders
the procurement outsourcing
contract. But sometimes, he
adds, these can be tantalisingly
difficult to quantify.
“It’s not difficult to measure
the time taken from purchase
requisition to purchase order,
and track what happens to that
interval over time.
“Likewise, it’s not difficult to
establish a target level of savings
with reference to a baseline,”
he observes. “But what’s more
difficult is arriving at, and
monitoring progress from, a
baseline that contains ‘softer’
and less well-defined metrics.
How best to measure customer
service, for example? And how
can you tell if the residual
internally-procured spend
categories are in fact being
managed more strategically?
Yet if they’re not, then there’s
an argument that, at least in
part, procurement outsourcing
isn’t delivering.”
A mismatch between a
client organisation and its
procurement outsourcing
provider is another area flagged
by observers as posing a difficulty
when it comes to developing
a successful procurement
outsourcing relationship.
“Lack of ‘fit’ is a common
failure factor in all outsourcing
relationships, but is particularly
important in procurement
outsourcing, not only in terms
of cultural fit, but also in terms
of selecting a procurement
outsourcing provider with the
right expertise and skills,”
says Cranfield School of
Management’s Mena.
And the latter is a particular
problem with respect to
procurement outsourcing
relationships with a broad
geographic reach, adds Don
Klock, professor of supply
chain management at America’s
Rutgers University, and former
CPO at consumer products
company Colgate-Palmolive.
“If you’re going to go global,
you really need to do due
diligence on your prospective
procurement outsourcing
provider,” he stresses. “You can
find providers who say that they
are global, but in practice it turns
out that they are strong in North
America and Europe, but weak in
Asia and Australasia.”
And as Cranfield’s Mena
suggests, the question of culture
is important, too – especially
when internal customers within
the client organisation find
themselves suddenly dealing
with a procurement outsourcing
provider located potentially
thousands of miles away,
and whose staff, however Æ
“Lack of fit is a common failure in all
outsourcing relationships, but is particularly
important in procurement outsourcing.”

8. 8
Procurement Leaders
PROCUREMENT OUTSOURCING
INSIGHT
proficient their English skills,
come from a very different
cultural tradition.
“It’s vital that people
within the organisation trust and
can work with the procurement
outsourcing provider just as much
as they trusted and worked with
the organisation’s own
procurement function,” notes
Klock. “Otherwise, you’ll have
your own internal people, who
are supposed to be working
strategically, being dragged
into tactical procurement
work, operating alongside, or
instead of, the procurement
outsourcing provider.”
So how can such difficulties
be overcome? What can
organisations do to translate
procurement outsourcing’s
theoretical promise into hard,
tangible benefits?
Talk to those familiar with the
challenge, and some recurring
themes quickly emerge.
Change management
One is the importance of
change management. “A move
to procurement outsourcing is
a huge change management
challenge, and organisations
need to be mature enough to
successfully undertake that
change management process
if they want procurement
outsourcing to deliver for them,”
says Mita Gupta, vice president
for global business development
at GEP. And especially in a
procurement outsourcing context,
she relates, change management
must address issues beyond
the usual change management
priorities associated with, say,
the implementation of a new
enterprise resource planning
system. One such issue, for
instance, is simply the sheer
range of internal organisational
functions that are impacted
by the move to a procurement
outsourcing provider.
As Gupta puts it: “Procurement
outsourcing touches everything.”
Simply put, functions and
internal customer groups as
diverse as in-house legal staff,
In mid-2013, as part of a
strategic impetus to improve
its competitiveness, Chicago-
headquartered $8bn multi-line
insurer Kemper Corporation
began a review of its procurement
practices. “Fairly quickly, we
found opportunities to make
improvements,” explains
Azhar Miah, assistant vice
president of corporate finance,
who led the review. “Procurement
lacked automation and efficiency,
in some areas purchasing
decisions were being made by
line personnel, and there was no
consistent end-to-end process
or perspective.”
But how best to fix things? And
fix them quickly, knowing that
they’d stay fixed? Moving to a
procurement outsourcing model
looked to be a promising option.
“It was really all about access
to appropriate expertise,” says
Miah. “We recognised that we
could spend a lot of time, effort
and money figuring out how
to improve things ourselves,
or we could call in people who
already knew the answers, who
did this for a living, and who
had best practices and market
intelligence that they could apply
on our behalf.”
An exhaustive study of the
procurement outsourcing
marketplace duly followed, with
Kemper calling in experts from
analyst firm Gartner Group
for their views. The eventual
outcome: a decision to go
with procurement outsourcing
specialists GEP. “In terms of
GEP’s industry knowledge,
culture, and procurement
expertise, GEP appeared to be the
best fit for our needs,” says Miah.
“In particular, GEP had a toolset
in areas such as spend analysis
which would help us to prioritise
where to focus our attentions.”
And in particular, he adds,
spend categories such as IT and
telecommunications, professional
services, travel and general
supplies seemed to offer some
especially low-hanging fruit. That
said, emphasises Miah, it’s early
days yet. But, four months into a
36-month transformation project,
Kemper is on course to deliver its
savings goals. And critically, he
adds, there has been a change in
attitude. “People are now thinking
about spend on an enterprise-
wide basis, which is a dramatic
change in mindset, and a huge
step forward,” he sums up.
INTERVIEW
Azhar Miah, assistant VP of corporate finance, Kemper Corporation

9. 9
Procurement Leaders
IT, marketing, manufacturing,
and research and development
will all have interactions with a
third-party outsourcing provider,
rather than a familiar internal
procurement function.
There can be advantages to
this, of course. For instance, in
the case of smaller organisations
and especially in categories
such as legal, IT and marketing
spend, this contact may result
in interaction with a provider Æ
who possesses a greater depth
of experience and knowledge
than did the former in-house
procurement team.
But certainly in advance of
the transition to procurement
outsourcing, such advantages
can’t be known in advance,
and nor will internal customers
necessarily be comfortable
dealing with a remote
organisation instead of familiar
in-house resource.
“It’s vital that the change
management process addresses
this inevitable fear of the
unknown,” emphasises Biju
Mohan, vice president of
consulting at GEP.
“As with any other significant
change in an organisation, there’s
a need to build consensus, and
a part of that is taking those
necessary steps to help people
overcome their fears and worries.
That said, it’s also important to
make it clear that the move to
procurement outsourcing is non-
negotiable, and that this is what
senior management has decided
to do.”
And as part of that change
management process, cultural
perceptions will need addressing
too if a smooth working
relationship is to be achieved.
Whether located on-site
or offshore – and a typical
procurement outsourcing
contract will likely involve an
element of both – the goal is
for the procurement outsourcing
provider’s people, wherever they
are located, to both act and
be viewed as an extension
of the client organisation’s
own operations.
Yet another recurring theme
is that procurement outsourcing
is a journey, not a destination.
GEP’s Bardell, for instance,
points to the evolution in client
goals and objectives that
typically takes place during
the course of a procurement
outsourcing relationship.
Initially, for example, the goals
underpinning a procurement
outsourcing contract will
usually be a combination of
‘hard’ objectives such as cost
savings, and ‘softer’ objectives
such as internal customer
“As with any other significant change
in an organisation, there is a need to
build consensus.”

10. Procurement Leaders
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PROCUREMENT OUTSOURCING
INSIGHT
satisfaction. But, as time goes
on and these early objectives
are satisfied, more demanding
goals come into play for the
procurement function to be seen
as a key enabler of competitive
edge, for instance, or for the
internal procurement function to
be focusing more strategically on
key categories.
How to leverage
“You start at a lower level
of maturity, and then build
up,” explains Bardell. “It’s
not that the client doesn’t
‘get it’ at first, it’s that their
understanding of how to leverage
a procurement outsourcing
relationship grows with time.
“Ultimately, you’re replacing
multiple commercial relationships
with multiple suppliers, with a
single commercial relationship
with your procurement
outsourcing provider. And
appreciating the full impact of
that, and working out how to
leverage it, isn’t something that
happens overnight.”
So how, then, should
an organisation approach
procurement outsourcing with a
view to maximising its value,
while simultaneously minimising
its downsides and difficulties?
At the risk of sounding
trite, say insiders, the most
obvious answer is ‘carefully’.
Procurement outsourcing, as
GEP’s Bardell sagely observes,
involves replacing multiple
commercial relationships with a
single commercial relationship,
and so it is vital that this single
relationship works as envisaged,
and delivers as planned.
At a minimum, then,
organisations must approach
procurement outsourcing
providers with a view to carefully
comparing and contrasting their
competing offerings. Moreover,
whendoingthis,itisimportantnot
to approach the question solely
from the standpoint of which
provider can offer the greatest
cost savings. Instead, they
should ask which holds out the
prospect of being the best overall
replacement for an in-house
procurement capability, across
a wide spectrum of benchmarks.
But which benchmarks in
particular? Therein lies the rub.
Given the evolutionary nature
of the procurement outsourcing
journey, there is no single ‘right’
set of benchmarks appropriate
for all organisations.
Instead, any such benchmarks
are best drawn up in the context
of the individual organisation:
here is where we are now, here is
where we’d like to be in, say, five
years’ time, and here are some
milestones that we recognise as
shaping the journey.
Most procurement outsourcing
providers will happily engage
in such a dialogue, and GEP
is no exception. Routinely,
explains Gupta, the firm
conducts pre- engagement
assessments, including a
detailed post-procurement
outsourcing organisation design
and process flow, in order to
tease out and highlight the value
that procurement outsourcing
may or may not offer an
individual organisation.
“Talk to us,” she sums up. “We
will work with you to identify if
procurement outsourcing is right
for your organisation, and what it
might deliver by way of value –
and deliver over the long term, as
well as in the short term.” n
ABOUT OUR PARTNER
GEP is a diverse, creative
team of people passionate
about procurement. The
firm invests itself entirely
in its clients’ success,
creating strong collaborative
relationships that deliver
extraordinary value year after
year. It delivers practical,
effective consulting, outsourcing
and technology solutions
that enable procurement
leaders to maximise their
impact on business operations,
strategy and financial
performance. Named a Star
Performer in Everest Group’s
Peak Matrix of Procurement
Services Providers, Winner
in the HfS Blueprint Report
on Procurement Outsourcing
Providers and to the Supply
Demand Chain Executive 100
for nearly a decade, GEP is also
ranked a leader on Gartner’s
Magic Quadrant analysis of
the world’s top procurement
software providers. Clark, NJ-
based GEP has ten offices and
operations centres in Europe,
Asia and the Americas.
Contact Details:
Tel: +1 732-382-6565
Web: www.gep.com
Email: info@gep.com